CENTRAL IMPRESSION SDN BHD - 2019

MARC has affirmed its rating for Central Impression Sdn Bhd’s (CISB) 11-year Fixed Rate Serial Bonds of RM120.0 million at AA-. The rating outlook has been revised to negative from stable.

The revised outlook reflects CISB’s reduced cash buffer mainly due to an unexpected tax liability arising from underpayments in prior years. This could potentially lead to a covenant breach of the debt service coverage ratio (DSCR) in 2021 and to a refinancing of the final bond instalment in 2025. In this circumstance, the rating would be downgraded if shareholders do not provide timely support or put in place measures to shore up cash reserves. As at end-July 2019, CISB’s designated account balances of about RM21.9 million are sufficient to meet the upcoming RM10.0 million principal redemption in November 2019.

The affirmed rating reflects the steady rental income from AEON Co (M) Berhad (AEON), the principal tenant of CISB-owned AEON Klebang shopping mall (AEON Klebang) in Ipoh. AEON’s lease rental payments are fixed at RM18.3 million p.a. for the first five years and RM18.7 million p.a. for the next five years, beginning from October 2015. Under the 10-year tenancy agreement, AEON has an option to renew its lease for an additional three terms of five years each. MARC views AEON’s credit profile as strong, driven by an established track record of operating malls and departmental stores in Malaysia and healthy financial performance.

The rental payments from AEON are channelled into designated accounts controlled by the trustee. CISB’s debt service ability to pay higher repayment amounts in the later years of the bond tenure would depend on conserving reserves early in the tenure. The annual bond repayment increased from RM5 million p.a. to RM10 million p.a. in November 2018 and to RM15 million p.a. from November 2020 onwards. During financial year ending March 31, 2018 (FY2018) and FY2019, a sum of RM3.2 million and RM1.6 million was paid to shareholders for earlier advances, reducing its cash buffer.

As a result of underpayment of tax in prior years, CISB has been required to pay tax arrears from FY2020 to FY2023, including penalty incurred up to FY2017, under an instalment plan approved by tax authority. The rating agency understands that the management has submitted an instalment plan to pay another RM4.4 million in tax arrears for FY2018 and FY2019 which would be less onerous on the cash flow if the instalment plan is accepted. Based on MARC’s sensitivity analysis that assumes the RM4.4 million is paid on the same instalment basis, CISB would breach the covenanted 1.5x DSCR in FY2022 (FY2019: 2.31x).

MARC also notes that CISB would be obliged to undertake a major refurbishment exercise on AEON Klebang in the fifth (2020) and tenth year of its tenure under the lease agreement should the contractor of AEON Klebang, Sycal Berhad fail to honour a corporate guarantee to undertake these refurbishments. The rating agency will monitor the developments in this regard.

MARC expects CISB to adhere to stringent discipline with regard to dividend payments and repayment of advances to shareholders given the higher principal repayment of RM15 million p.a. from November 2020 onwards compared to RM10 million in the previous year. Bondholders have the first legal charge on AEON Klebang, which is valued at RM300 million in July 2019. As at September 30, 2019, RM100 million of the bonds remain outstanding.

Major Rating Factors

Strength

• Lease rental from creditworthy AEON Co (M) Berhad.

Challenge/Risk

• Potential breach in covenant due to unexpected tax liability.