MARC has assigned ratings of AAA, AA and B- on Special Coral Sdn Bhd’s RM250.0 million Senior Class A Medium-Term Notes (MTN), RM50.0 million Senior Class B MTN and RM800.0 million Subordinated Class MTN under the existing RM1.1 billion MTN programme. The ratings carry a stable outlook. 

Proceeds from the Class A MTN issuance will be utilised to repay the maturing existing Class A MTN of RM200.0 million on March 31, 2020. As at January 2, 2020, the outstanding Subordinated Class MTN stood at RM506.3 million while there has been no drawdown under Class B MTN. The existing Class A MTN, Class B MTN and Subordinated Class MTN carry ratings of AAA, AA and B-.

Special Coral is a special purpose vehicle which was incorporated to set up the existing RM1.1 billion MTN programme. It owns approximately 91.6% of the retail strata area in Queensbay Mall, an eight-storey shopping complex in Penang with a net lettable area (NLA) of 881,419 sq ft. The MTN are secured by a first legal charge over the strata titles of Queensbay Mall. 

The assigned ratings reflect the MTN classes’ loan-to-value (LTV) ratios which remain within the LTV benchmarks that MARC applies for the rating bands. Based on the rating agency’s valuation of the mall at RM644.4 million, the Class A MTN, Class B MTN and Subordinated Class MTN have LTV ratios of 38.8%, 46.6% and 170.7%. The LTV ratios provide sufficient protection against collateral performance stress for the Senior Class MTN holders. The rating on the Subordinated Notes reflects their lower priority in payment. The coupon payments of the Subordinated Class MTN are deferrable and non-interest bearing, thus moderating coupon repayment risks.

The operational performance of Queensbay Mall remains resilient as demonstrated by its high occupancy levels and commendable average rental rate. As at December 31, 2019, the mall recorded an overall occupancy rate of 99.7% (2018: 97.6%) and an average rental rate of RM8.96 psf (2018: RM8.66 psf). Tenant concentration risk is low given its diversified tenancy profiles, with the anchor tenant occupying 28.9% of NLA and contributing 8.1% of total rental income. We note that 30.3% of its total NLA will be expiring in 2020, on excluding the expiring NLA of the anchor tenant which has indicated that it will renew the lease agreement. Tenancy renewal risk is moderated by the management’s strong track record of achieving high tenant retention rates and the mall’s stable shopper traffic volume. Nonetheless, the incoming supply of new malls in Penang over the medium term could weigh on occupancy levels and rental rates.

In line with the improved operational performance, Special Coral registered a 6.8% y-o-y growth in net operating income (NOI) to RM78.6 million in 2019 (2018: RM73.6 million), translating to a debt service cover ratio (DSCR) of 6.98x and 5.71x for Class A and Class B MTN. The improvement in NOI led to a 9.3% y-o-y increase in cash flow from operations (CFO) to RM79.7 million. Cash and bank balance of RM25.3 million as at end-December 2019 supports financial flexibility. 

The stable outlook reflects the rating agency’s expectation that the operational and financial performance of Queensbay Mall would be commensurate with the ratings.