View Credit Analysis Report (6053639)

Date Article2021-04-08 00:00:00
Rating action

MARC 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


The affirmed ratings reflect the MTN classes’ loan-to-value (LTV) ratios which remain within the respective benchmarks MARC applies for the rating bands. Based on the valuation of the eight-storey Queensbay Mall using MARC’s income capitalisation approach, the Class A MTN, Class B MTN and Subordinated Class MTN have LTV ratios of 40.9%, 49.1% and 180.0%. Under this approach, the mall in which Special Coral owns 91.6% of the strata area is valued at RM611.1 million. This represents a 35.6% discount from the market value of RM949.0 million as at end-December 2020 as ascertained by a valuer. 

Queensbay Mall’s strategic location in Bayan Lepas, Penang and diversified tenant profile have largely moderated the impact from the pandemic on its operating performance. Both the occupancy level and average rental rate declined marginally to 97.0% and RM8.75 psf (2019: 99.7%; RM8.96 psf), notwithstanding the significantly lower shopper traffic volume of 9.1 million visitors at Queensbay Mall (2019: 15.2 million). To alleviate the tough environment for retailers, management has provided rental rebates for its tenants that have aided in maintaining the strong occupancy level. However, we understand that the occupancy level could fluctuate marginally in the near term taking into consideration the impact of the ongoing pandemic on the retail sector. 

We also view the tenant concentration risk to be low given the mall’s diversified tenant profile; its anchor tenant contributes about 8.6% of total rental income although it occupies 29.8% of the total net lettable area (NLA) of 881,458 sq ft. Tenancy renewal risk is largely mitigated by the management’s track record of achieving high tenant retention; nonetheless there is some concern on renewal risk given that about 28.3% of its total NLA will expire during 2021 against a backdrop of a weak outlook for retail.

Special Coral’s financial performance in 2020 was characterised by lower revenue and reduced cash flow. The weaker performance arose largely from the closure of retail operations between March and May 2020, low shopper traffic volume in the subsequent months as well as the rental rebates offered to tenants. As a result, Special Coral registered a 30.1% y-o-y decline in net operating income (NOI) to RM55.3 million. In our rating case assessment, we assumed the stabilised NOI to be RM55.0 million given the weak outlook for the retail industry. Our sensitivity analysis shows that it can withstand another 5% decline in NOI and still be within the rating bands under the present MTN limits of RM250 million for Class A MTN and RM50 million for Class B MTN. The outstanding for Class A MTN stood at RM200 million while there is no outstanding in Class B MTN.

Special Coral’s debt service cover ratio (DSCR) declined to 5.20x and 4.21x for Class A and Class B MTN (2019: 7.03x; 5.75x). We also note that Special Coral recorded a fair value loss of RM94.5 million on the property in 2020, leading to a loss before tax of RM123.8 million. During the period, management deferred partial coupon repayments of Subordinated Class MTN amounting to RM61.0 million, as allowed by the terms of the MTN structure. Its cash position stood at RM58.4 million at end-2020. Outstanding Senior Class A MTN stood at RM200.0 million at end-January 2021 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 cash flow generation from the mall and/or measures undertaken by the key shareholder will support the LTV ratios for the rating bands. 

Rating trajectory 

Downside scenario

The ratings may come under pressure if the NOI weakens sharply from current level assuming that the MTN limits are not adjusted to reflect the lower cash flow generation. 

Key strengths
  • Strong occupancy level 
  • Low tenant concentration risk
  • Resilient operating performance 
Key risks
  • Tenant renewal risk on leases with short tenures
  • Pressure on rental could arise from tough business conditions for retailers 

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