MARC has affirmed the ratings of MARC-1/AAA on the RM125 million Class A notes and MARC-1/AA on the RM50 million Class B notes of Mutual Streams Sdn Bhd’s (Mutual Streams) RM650 million Commercial Papers/Medium Term Notes (CP/MTN) programme. The outlook on the ratings is stable. The ratings mainly reflect the satisfactory performance of the securitised property which has generated better-than-expected operating cash flows. Additionally, MARC views the dependency of the transaction on the call option granted to CapitaMalls Asia Ltd (CMA, previously known as CapitaLand Retail Limited), a majority-owned subsidiary of Singapore’s CapitaLand Limited (CapitaLand), as the mechanism of principal repayment, favourably.  MARC draws comfort from CapitaLand’s reputation, track record in financing transactions which indicates a high probability of executing a successful refinancing, the strong financial position of CMA, and the liquidity reserves of CapitaLand amounting to SGD5.4 billion as of September 2009. These strengths are moderated by the sensitivity of the mall’s performance to economic conditions and minimal structural enhancement with regards to liquidity support. The RM475 million of Class C is not rated.

Mutual Streams is a special purpose vehicle incorporated to facilitate fund raising for CMA through securitisation of a designated piece of land together with its building, Mines Shopping Fair (Mines) that it has purchased from Mines Shopping Fair Sdn Bhd (MSF). The acquisition of the Mines, was financed by proceeds of RM175 million of senior notes and RM260 million Class C notes. The sale of the Mines was structured as true-sale for legal purposes with all existing rental (tenancy) agreements being novated to Mutual Streams. Monthly rental payments that are directed into Mutual Stream’s revenue account form the source of senior notes’ expenses and coupon payments for the programme. The transaction has been structured on an interest-only basis, with no amortisation of principal prior to maturity date, and incorporates a property call option granted to CMA to address the redemption of the notes prior to or at maturity. In addition, it features a put and a call options exercisable by the trustee and CMA respectively to effect disposal of the securitised assets in the event CMA fails to refinance.
 
The Mines is located in Mines Resort City in Seri Kembangan, Selangor, with total net lettable area of 718,777 square feet (sq ft) as of September 30, 2009. This represents an enlarged area by about 11% to 70,000 sq ft from its size at closing, largely due to the asset enhancement initiatives (AEI) undertaken by Mutual Streams since closing of the transaction in December 2007. Notwithstanding the additional net lettable area and property market downcycle, the occupancy rate of the mall improved to 98% as of September 2009 from 83% upon acquisition, reflecting the property management experience of CapitaLand Retail Malaysia Sdn Bhd (CRM) and the appointed property manager, Ooi & Zaharin Sdn Bhd (Knight Frank Malaysia). The enlarged area resulting from the AEI and tenant remix has enhanced the cash flow generating ability of the mall and the mall’s overall yield. Based on the tenancy profile, MARC views the Mines as having low tenant concentration risk with top 10 tenants contributing less than 20% of total gross monthly rental. In addition, the non-renewal risk of leases is limited in the near- to medium-term with lease maturities that are well distributed over the next three years to 2012.
 
Given the non-amortising structure of the notes, the LTV ratios for class A and Class B notes have remained at 43.1% and 60.3% respectively, based on MARC’s discounted cash flow valuation of RM290 million of the property. During the nine-month period under review - January 2009 to September 2009 - the total net operating income (NOI) by the securitised property is within the initial projection at RM22.7 million, on the back of higher-than-expected rental revenue. The NOI would have been higher if not for the substantial increase in utilities and marketing expenses incurred in relation to the new retail area. Moving forward, the higher rental revenue and good maturity profile of the leases are expected to preserve Mines’ cash flow sustainability over the near-to-medium term. The transaction also recorded good cash flow coverages as reflected by DSCRs of 5.3 times (x) and 3.6x respectively for Class A and Class B notes, comfortably higher than MARC’s internal minimum DSCR requirement.

Commingling risk is deemed low under this transaction as monthly cash flows generated by the securitised property are trapped in accounts mainly controlled/governed by the Trustee. The utilisation of funds for operating expenses is defined with a certain amount of flexibility given for asset enhancement activities to increase property yields.

However, MARC notes the absence of structural enhancement features such as pre-funded liquidity reserve, regular coupon build-up or third party undertaking for shortfalls in payment obligations under the notes to substantially temper the liquidity risk of the notes. The subordination of payments of coupon and principal of Class C notes which accounts for about 66%, or RM340.5 million of the total outstanding principal, partially mitigates the risk of property cash flow shortfalls in the event of a severe decline in rental collections.

The stable outlook reflects expectations that Mutual Streams will maintain its cash flow generation ability in the future premised on the quality and the performance of the securitised property, supported by CRM’s real estate property management experience. MARC will continue to monitor the financial condition of CMA in relation to its capacity to fulfil its obligations as the call options holder for the principal redemption of the Senior MTN notes.

Contacts:
Nadia Edmaz Abdul Hadi, 03-2090 2262/ nadia@marc.com.my;
Sandeep Bhattacharya, 03-2090 2247/ sandeep@marc.com.my