RAM Ratings assigns preliminary ratings to Quill Retail Mallsâ€™ proposed Sukuk Murabaha
RAM Ratings has assigned respective preliminary ratings of AA1/Stable, AA3/Stable, A2/Stable and A3/Stable to Quill Retail Malls Sdn Bhd’s (QRMSB) proposed RM 200 million Class A, RM 70 million Class B, RM 50 million Class C and RM 30 million Class D Sukuk Murabahah.
The proposed issues are part of QRMSB’s plan to refinance its outstanding CP/MTN programme of up to RM 850 million (established in 2013) primarily to fund the development of Quill City Mall (the Mall or the Property) – the asset to be securitised.
The ratings are supported by the available collateral as well as the transaction’s structural features that ensure timely repayment of the Sukuk Murabahah by the legal maturity. Based on RAM’s assessed adjusted valuation of RM 595 million for the Property, the respective loan-to-value (LTV) ratios of 33.6 per cent, 45.4 per cent, 53.8 per cent and 58.8 per cent provide adequate credit support for the preliminary ratings assigned to the Class A, Class B, Class C and Class D Sukuk Murabahah. RAM Ratings highlights that its assessment of the Property’s adjusted valuation considers the characteristics of the underlying asset, its short operating history of about two years and the asset outlook for Quill City Mall. As the disposal of the Property is the ultimate recourse for the Sukuk holders, the transaction incorporates predefined trigger events to initiate the sale.
As the Mall is only in its second year of operations and has yet to demonstrate a sustainable cashflow performance, the transaction’s periodic obligations are envisaged to be met through the Property’s cashflow and an irrevocable standby liquidity facility (LF) or bank guarantee (BG) facility of up to RM million (if required). The LF/BG can be reduced by RM million per annum (subject to meeting the relevant conditions) and will rank after the Sukuk Murabahah in terms of security, with no recourse to QRMSB. Based on our assessment, QRMSB may require support from the LF/BG to meet its ongoing profit obligations if its weak operating cashflow arising from slow rental collections persist. RAM Ratings believes that the RM 50 million limit should be sufficient to bridge the expected shortfall in the Mall’s cashflow vis-à-vis timely payments on the Sukuk Murabahah’s profit obligations up to the legal maturity. Furthermore, the transaction’s cash-trapping mechanism that is based on asset performance adds further liquidity support, particularly in the initial years given the unseasoned property profile amid a challenging retail environment.
Based on its performance in 9M 2016, the Mall achieved an annualised net property income of RM 20 million, although its cashflow is expected to be 21 per cent lower given the present average rental collection rate of 79 per cent. That said, we understand that QRMSB recently tightened its credit practices, which should further improve its rental collections. Meanwhile, the Mall is also exposed to tenant-concentration risk as AEON Co (M) Berhad (its major anchor tenant) occupies 32 per cent of its net lettable area (NLA). Furthermore, the Property’s lease-maturity profile is lumpy as a substantial 80 per cent of its NLA will be due for renewal in 2017. While some comfort can be derived from this anchor tenant’s long-term lease (i.e. 10 terms of three years each), we remain mindful of the Mall’s yet-to-be-proven ability to establish a niche with the right tenant mix during the gestation period, given the softer retail market.
QRMSB is a member of the Quill group of companies (Quill Group) that was established in 1988 by Dato’ Jennifer Low and Dato’ Michael Ong. Quill Group is a multi-disciplinary property group, although it recently diversified into luxury vehicles and health services. RAM highlights that Quill City Mall is the first retail mall managed by the Group; it remains to be seen if the Group can transfer its expertise in managing custom-built buildings to the retail arena. That said, some comfort can be derived from the supporting middle-management line-up, who have about 16 years’ experience in the shopping industry.