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. The ratings outlook is stable. As at April 1, 2019, Special Coral had outstanding Senior Class A MTN of RM200.0 million and Subordinated Class MTN of RM506.3 million.

The ratings affirmation is premised on the Class A MTN, Class B MTN and Subordinated Class MTN’s loan-to-value (LTV) ratios of 38.8%, 46.6% and 170.7% that are in line with MARC’s LTV benchmarks for the different rating bands. The LTVs were calculated based on MARC’s valuation of collateral property Queensbay Mall at RM644.4 million which was derived through an income capitalisation approach. The rating agency’s collateral valuation represents a significant discount to the property’s market value as at end-December 2018. The LTV ratios provide adequate protection against collateral performance stress for the Senior Class MTN holders. The MTNs are secured by a first legal charge over Queensbay Mall.

Queensbay Mall is an eight-storey retail property in Penang with a net lettable area (NLA) of 881,413 sq ft. Its rental rate has remained strong at an average of RM8.66 psf in 2018 (2017: RM8.26 psf) partly due to its favourable location close to the Bayan Lepas Free Trade zone and several residential areas. The mall’s occupancy level has remained steady over the years, registering 97.6% as at end-December 2018 (2017: 98.5%). While MARC notes that more than half of its NLA is up for renewal in 2019, tenancy renewal risk is substantially mitigated by the management’s healthy track record in maintaining a high occupancy level and the mall’s strong catchment areas that are reflected in the consistently high shopper traffic volume. The rating agency also notes the mall’s low concentration risk; its anchor tenant contributes only 7.9% of total rental revenue, though it occupies 29.6% of NLA. These positives notwithstanding, the subdued retail industry outlook and competition from upcoming new malls in Penang could potentially weigh on tenant retention and rental rates.

Net operating income improved to RM73.6 million, which translates to a debt service cover ratio (DSCR) of 6.5x and 5.3x for the outstanding Class A and Class B MTN for 2018. MARC notes that the Subordinated MTN deferrable coupon payments do not attract penalty interest and therefore moderate coupon repayment risks. The failure to pay the amount due under the Subordinated MTN during the tenure of the MTN Programme does not constitute as an event of default. For 2018, the coupon payments on the Subordinated Class MTN of RM72.8 million contributed to the low CFO interest cover of 0.89x; excluding this payment, the CFO interest cover would be 8.19x. Cash and bank balance of RM28.0 million as at end-December 2018 supports financial flexibility.

CapitaLand Mall Asia Limited (CMA), a subsidiary of CapitaLand Limited, holds the Senior MTN call option which grants the right to purchase all outstanding Senior Class MTN at the call option price on or after (i) a trigger event; or (ii) an event of default; or (iii) a reinstatement event. CMA also holds a property call option on Queensbay Mall. The option is exercisable any time prior to a trigger event or an event of default. The stable outlook reflects MARC’s expectation that the operational and financial performance of Queensbay Mall would remain supportive of ratings.

Contacts:
Chia Kah Yie, +603-2717 2961 / kahyie@marc.com.my;
Lim Wooi Loon, +603-2717 2943 / wooiloon@marc.com.my;
Lim Hui Boon, +603-2717 2959 / huiboon@marc.com.my