MARC Ratings has affirmed its AA- rating on Central Impression Sdn Bhd’s (CISB) outstanding RM30.0 million Fixed Rate Serial Bonds. The rating outlook is stable. 

The rating reflects the credit strength of AEON Co (M) Berhad (AEON), which, as the principal lessee of CISB-owned AEON Mall Ipoh Klebang, makes periodic fixed lease payments under a lease agreement. The payments are deemed sufficient to meet financial obligations on the bond. Given the fixed lease payment arrangement, CISB is not exposed to sublease-related risks including termination and sublease credit risks. AEON makes equal monthly lease payments totalling RM18.3 million p.a. to CISB. The mall has 506,000 sq ft of net lettable area (NLA).

MARC Ratings considers Japan-based AEON Co Ltd’s 51.7% ownership of AEON, and AEON’s established track record in the Malaysian retail sector since 1984 as well as healthy financial metrics as key factors in assessing AEON’s credit profile. As at end-March 2024, AEON operates 35 department stores in the country, with 28 self-managed malls. 

MARC Ratings notes that the 10-year lease agreement between CISB and AEON will expire in October 2025 with an option to extend for another five years. Of the outstanding RM30.0 million bonds, RM15.0 million will be due in November 2024 and the final RM15.0 million in November 2025 — a month after the expiry of the tenancy. The rating agency understands that AEON would extend the tenancy at the mall given its well-established operations. Nonetheless, assuming the unlikely event of non-extension, the post-distribution debt service cover ratio (DSCR) of 1.75x provides a buffer in CISB’s designated accounts for the bond’s final principal and coupon payments. 

Based on its unaudited financial statement for the financial year ended March 31, 2024 (FY2024), CISB’s designated account balances stood at RM17.8 million as at that date. The rating agency notes that CISB has tax arrears although the latter is making instalment payments to the tax authority to resolve the issue. A CISB shareholder’s irrevocable undertaking to provide financial support for any operational shortfall in the company’s obligations, which include tax payments, alleviates the rating agency’s concerns. 

The stable outlook incorporates MARC Ratings’ expectation that CISB will continue to receive timely lease payments from AEON as well as financial support from CISB’s shareholders to ensure the company’s cash flow remains supportive of meeting its financial obligations (including the covenanted minimum DSCR of 1.5x under the structure).

No upside to the rating is envisaged in the near term. There can be multiple-notch downgrades if shareholders fail to provide timely financial support to the company for its tax obligations when required, which could lead to tax payments being made from the designated accounts, potentially breaching CISB’s covenanted DSCR.