MARC has affirmed its AA- rating on Central Impression Sdn Bhd’s (CISB) RM120.0 million Fixed Rate Serial Bonds. The rating outlook remains negative. 

The rating outlook was revised to negative last year over its reduced cash buffer due to a higher tax liability arising from underpayments in prior years totalling RM3.2 million. CISB is required to settle the tax arrears in four annual instalments upon notification from the tax authority. The shareholders have given an irrevocable letter of undertaking to meet the unpaid tax obligations. The negative outlook is maintained to reflect the weakening in the debt service coverage in the event the shareholders fail to provide timely cash support to the issuer; in this case, CISB’s debt service cover ratio (DSCR) would fall below the covenanted 1.5x in FY2022. The absence of shareholders’ support and/or any legal action instituted by the tax authority would heighten credit risk and lead to a potential rating downgrade. 

The affirmed rating reflects the credit strength of AEON Co (M) Berhad (AEON) as the principal lessee of the AEON Klebang shopping mall (AEON Klebang) in Ipoh, which is owned by CISB. AEON is a 51.0%-owned subsidiary of Japan-based AEON Co Ltd. Over the near term, the economic impact from the COVID-19 pandemic would weigh on AEON’s operational performance and occupancy rate. Nonetheless, regardless of the occupancy levels AEON is obligated to make lease payments to CISB, which are fixed at RM18.3 million p.a. for the first five years beginning October 2015 and RM18.7 million p.a. for the next five years.

CISB has continued to collect full monthly lease rental income from AEON during the imposition of the movement control order. As such, the company does not face any short-term liquidity risk with its designated account balance of RM23.7 million more than sufficient to meet immediate financial obligations amounting to RM17.0 million in November 2020. 

The rating agency notes that major refurbishments would be required in 2020 (the fifth year) and in 2025 (the tenth year) under the lease agreement if requested by AEON. Sycal Berhad, the contractor of AEON Klebang, has provided a corporate guarantee to AEON to undertake these major refurbishments, failing which CISB would need to undertake them. To date, AEON has not made any such request. 

CISB is expected to exercise discipline in dividend payments and repayment of shareholders’ advances. MARC takes comfort from the restriction of distributions by CISB if the post-distribution DSCR falls below 1.75x. The bondholders have the first legal charge on AEON Klebang, which is valued at RM300 million, while outstanding bonds stood at RM90 million as at July 30, 2020.

Lim Wooi Loon, +603-2717 2943/ wooiloon@marc.com.my;

Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my