CREDIT ANALYSIS REPORT

SPECIAL CORAL SDN BHD - 2022

Report ID 605389004701 Popularity 60 views 4 downloads 
Report Date May 2022 Product  
Company / Issuer Special Coral Sdn Bhd Sector Property
Price (RM)
Normal: RM500.00        
  Add to Cart
Rationale
Rating action     
MARC Ratings has affirmed its ratings of AAA, AA and B- on special purpose vehicle 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 outlook is stable.

Rationale     
The ratings reflect the MTN classes’ loan-to-value (LTV) ratios which remain within the respective benchmarks MARC Ratings applies for the rating bands, as per table below: 

Exhibit 1: LTV ratios for outstanding rated issuance

Outstanding rated issuance      RM million        Actual LTV       Rating
Class A MTN                                  250                      42.1%              AAA
Class B MTN                                   50                       50.5%1              AA
Subordinated Class MTN              800                      185.0%2               B-

1 Outstanding amount of Class A and Class B divided by collateral valuation assuming full issuance
2 Outstanding amount of Class A, Class B and Subordinated Class MTN divided by collateral valuation assuming full issuance

The LTV ratios are derived from the valuation of the eight-storey Queensbay Mall of RM594.4 million under MARC Ratings’ income capitalisation approach. This represents a 37.3% discount from the market value of RM948.0 million as at end-2021 as ascertained by a valuer. 

For 2021, the average rental rate for Queensbay Mall declined by 4.5% y-o-y to RM8.36 psf as demand for retail space remained subdued, weighed down by the continued impact of the pandemic. However, as at end-2021 occupancy level remained strong at 95.8% (2020: 97.0%) of total net lettable area (NLA) of 880,680 sq ft, supported by tenant retention measures including providing rental rebates to alleviate the slowdown in retail business. While historically tenancy renewal risk has been largely mitigated by the management’s strong track record of achieving high tenant retention, there is some concern on renewal risk in the current challenging period for the retailers. The rating agency notes that about 40.8% of its total NLA will expire in 2022.

MARC Ratings regards the mall’s diversified tenant profile that gives rise to low tenant concentration risk as a key strength. Its anchor tenant only contributes 9.2% of total rental income although it occupies 29.0% of NLA.

For 2021, Special Coral’s financial performance reflected the impact of the pandemic-induced closures, with revenue declining by 5.5% y-o-y to RM84.8 million. Rental rebates contributed to a 9.2% y-o-y decline in net operating income (NOI) to RM50.2 million. Special Coral has indicated that as the retail outlook is improving, it will endeavour to discontinue providing rental rebates in 2022 barring any unforeseen circumstances; it expects its NOI to steadily increase from 2022 onwards. While MARC Ratings notes that the NOI was above RM70 million in the years prior to the onset of the pandemic, in our rating case assessment, we assumed the stabilised NOI to be RM53.5 million. This incorporates an expectation of lower average rental rates and a lower rate of rental rebates of 50% assuming that some retailers may continue to need support. 

Special Coral’s debt service cover ratio (DSCR) declined to 4.73x and 3.83x for Class A and Class B MTN (2020: 5.20x; 4.21x). In 2021, coupon repayments of Subordinated Class MTN amounting to RM57.8 million were deferred, as allowed by the terms of the MTN structure, which resulted in its cash position to be higher by 34.9%, standing at RM78.7 million as at end-2021. Outstanding amount for Senior Class A MTN stood at RM200.0 million as at end-January 2022 with expected maturity in March 2023, and Subordinated Class MTN of RM506.3 million with expected maturity in October 2029.

Rating outlook     
The stable outlook reflects the rating agency’s expectation that the NOI would improve with some recovery in retailing helping to support occupancy level at the mall. The outlook also assumes that the shareholder has the ability to undertake measures to support the LTV ratios for the rating bands.  

Rating trajectory     

Downside scenario     
The ratings will be lowered if the NOI weakens from the current level to breach the LTV bands for the ratings and if no timely adjustments are made to the MTN limits to reflect the weaker cash flow. 

Key strengths
Low tenant concentration risk 
Strong market position of the Queensbay Mall in Penang

Key risks
Tenant renewal risk on leases with short tenures
Rebates if continued would affect rental income
Limited upside on rental increases upon tenancy renewals given tough retail conditions

Related