MARC has affirmed its ratings of AAA, AA and B- on Special Coral Sdn Bhd’s RM250.0 million Senior Class A Medium-Term Notes (MTN) (Class A MTN), RM50.0 million Senior Class B MTN (Class B MTN) and RM800.0 million Subordinated Class MTN respectively. The outlook on the ratings is stable. As at March 31, 2018, Special Coral has outstanding Senior Class A MTN of RM200.0 million and Subordinated Class MTN of RM506.3 million.

Special Coral owns Queensbay Mall, an eight-storey retail property in Penang with a net lettable area (NLA) of 880,717 sq ft and an occupancy rate of 98.5% as at end-December 2017. The MTNs are secured by a first legal charge over the mall. The affirmed ratings reflect the MTN classes’ loan-to-value (LTV) ratios which remain within MARC’s LTV benchmarks for the rating bands. The Class A MTN, Class B MTN and Subordinated Class MTN have low LTV ratios of 38.8%, 46.6% and 170.7% based on MARC’s valuation of Queensbay Mall at RM644.4 million.

MARC opines that 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 which prevent any erosion of Special Coral’s interest servicing ability on the Senior Class MTN during performance stresses.

MARC has maintained the valuation for Queensbay Mall despite the subdued retail industry outlook as the mall has continued to perform well. In 2017, the mall posted a higher average rental rate of RM8.26 psf and recorded higher occupancy levels at 98.5% (2016: RM8.00 psf; 98.3%). It has low tenant concentration risk with anchor tenant AEON Co. (M) Berhad (AEON) contributing only 8.3% of total rental income. MARC’s valuation represents a discount of 35.4% against the appraised market value of RM997.3 million as at December 31, 2017. This provides sufficient collateral coverage on the MTN in the event the mall is disposed. As at December 31, 2017, the collateral’s net operating income of RM71.6 million translates to a debt service cover ratio (DSCR) of 6.4 times and 5.2 times for the outstanding Class A and Class B MTN for 2017.

Tenant renewal risk is deemed moderate with 176 leases accounting for 37.2% of the NLA expiring this year. Tenancy renewal risk is mitigated by a stable shopper traffic profile and management’s strong track record of achieving a high tenant retention rate. The mall’s good location, supported by its proximity to the Bayan Lepas main industrial area, remains a key factor mitigating tenant renewal concern.

For 2017, Special Coral reported higher revenue of RM103.9 million (2016: RM99.0 million) and operating profit margin of 68.5% (2016: 67.3%). This led to stronger cash flow from operations of RM71.5 million (2016: RM67.3 million).

The stable outlook reflects the rating agency’s expectations that Queensbay Mall will maintain its stable operational and financial performance which are commensurate with the ratings.

Contacts:
Lim Chi Ching, +603-2717 2963/ chiching@marc.com.my;
David Lee, +603-2717 2955/ david@marc.com.my.