Special Coral Sdn Bhd - 2017

MARC has assigned ratings of AAA, AA and B- to Special Coral Sdn Bhd’s (Special Coral) up to RM250 million Senior Class A Medium-Term Notes (MTN) (Class A MTN), RM50 million Senior Class B MTN (Class B MTN) and RM800 million Subordinated Class MTN respectively. The ratings outlook is stable. The Senior and Subordinated Class MTN will be issued from Special Coral’s existing RM1.1 billion MTN Programme under which the outstanding amount of the existing Class A MTN, Class B MTN and Subordinated Class MTN is RM160 million, RM40 million and RM506.3 million respectively. The existing Class A MTN, Class B MTN and Subordinated Class MTN carry ratings of AAA, AA+ and B- respectively.  

Proceeds from the issuance of the new Senior Class MTN will be utilised to repay the maturing existing Class A and Class B MTN on March 31, 2017. Special Coral owns 91.6% of gross retail area of Queensbay Mall, an eight-storey retail property in Penang with net lettable area (NLA) of 881,555 sq ft and occupancy rate of 98.3% as at end-December 2016. The MTNs are secured by a first legal charge over the mall.  

The assigned ratings reflect the MTN classes’ loan-to-value (LTV) ratios which are in line with MARC’s LTV benchmarks for the different rating bands. The Class A MTN, Class B MTN and Subordinated Class MTN under the revised tranche have LTV ratios of 38.8%, 46.6% and 170.7% respectively based on MARC’s revised value of Queensbay Mall of RM644.4 million. The collateral value is derived from a higher stabilised net operating income (NOI) of RM58.0 million (2015: RM50.2 million) and capitalisation rate of 9%. MARC notes that the LTV ratios should provide a sufficient protection against collateral performance stress for the Senior Class MTN holders. 

MARC considers the healthy performance of the mall as reflected by its high occupancy levels amid a subdued retail outlook as an important factor. For 2016, the mall managed to achieve higher average rental rate of RM8.00 psf compared to RM7.75 psf in the last corresponding period. Further supporting the collateral performance is the very low tenant concentration risk with only one tenant contributing to about 7.9% of Queensbay Mall’s total rental income. Tenant renewal risk is deemed manageable with 117 leases accounting for 23.7% of its NLA expiring in 2017. The renewal risk is mitigated by the mall’s good location, supported by its proximity to the main industrial area of Bayan Lepas and stable shopper traffic profile. In addition, tenancy renewal is supported by the management’s track record of achieving a high tenant retention rate as has been evident in the mall’s resilient historical occupancy performance.

MARC’s revised value for the mall represents a discount of 33.4% against the appraised market value of RM968.0 million as at December 31, 2016. This provides sufficient collateral coverage on the MTN should the mall be disposed. As at December 31, 2016, the rise in NOI to RM67.1 million translates to a debt service cover ratio (DSCR) of 6.2 times and 4.9 times for the outstanding Class A and Class B MTN respectively for 2016 (2015: 5.4 times; 4.2 times).  

MARC notes that Special Coral’s leverage position has weakened due to an additional drawdown of RM30.3 million Subordinated Class MTN during the period under review. Coupled with the Subordinated Class MTN’s high coupon rate of 15%, the increased finance cost is expected to exert pressure on Special Coral’s profitability metrics. Notwithstanding this, the coupon payments of the Subordinated Class MTN are deferrable, preventing any erosion of Special Coral’s interest servicing ability on the Senior Class MTN. Additional comfort is derived from the Senior Class MTN’s higher ranking with respect to security benefits and payment priority against the Subordinated Class MTN. 

The stable rating outlook reflects the rating agency’s expectations that Queensbay Mall will maintain its stable operational and financial performance which commensurate with the ratings.   

Major Rating Factors 

Strengths

·         Good location and healthy occupancy levels;

·         Low tenant concentration risk; and

·         Steady operating track record and stable net operating income. 

Challenges/Risks

·         Income risk arising from some leases with short tenures; and

·         Subdued retail outlook could weigh on rental rates.