Published on 17 Apr 2020.
RAM Ratings has reaffirmed the respective AAA/Stable and AA2/Stable ratings of the RM295 mil Class A and RM60 mil Class B Issue 2 Sukuk Ijarah under Al-‘Aqar Capital Sdn Bhd’s (Issuer) RM1 bil IMTN Programme. The RM220 mil Class C notes are unrated. Al-‘Aqar Capital is a wholly owned funding conduit of Al-‘Aqar Healthcare REIT (the REIT). KPJ Healthcare Berhad (KPJ Group) holds an indirect 37% stake in the REIT.
The reaffirmation reflects the stable performance of the underlying 19 properties – comprising 16 hospitals and three wellness/health centres – secured under Issue 2 (the Properties) and expectations that their sturdy showing will be maintained, underpinned by long-term lease arrangements with KPJ Group. The Properties’ rental income came in at RM86.5 mil in FY Dec 2019, exceeding our annual sustainable cashflow assumption of RM85.0 mil. The stable rental income ensures strong credit support for the respective AAA and AA2 ratings, with loan-to-value ratios of 38.2% and 45.9% and stressed finance service coverage ratios of 2.37 times and 2.25 times.
As at end-December 2019, the Properties’ collective market value had appreciated by a slight 1.42% y-o-y to RM1.25 bil. The underlying properties are well diversified in terms of asset size, location and multi-disciplinary medical services as they include large, established hospitals and mid-sized community medical centres. Most of the Properties are located in established urban areas of Kuala Lumpur, Selangor and Johor, among other states. During the review period, the transaction comfortably met all required financial covenants at both the issue and REIT levels.
While the transaction is exposed to risks from various new developments undertaken by KPJ Group in respect of the Properties, these are deemed manageable. Any disposal prior to the completion of new developments may affect the overall quality of the security package under the transaction. The proportion of properties undergoing new development stayed at 8.5% of the portfolio’s market value while all land title exercises have been completed, thus alleviating this risk. Additionally, the REIT has indicated an intention to undertake its own development for any potential hospital expansion going forward, as permitted by the Security Commission’s guidelines. As this is a new foray for the REIT, execution risk is a factor. Nonetheless, we expect any new initiatives to be managed prudently without affecting the integrity of the transaction structure.
The transaction is also exposed to single-counterparty risk as the Issuer’s ability to meet its obligations under Issue 2 ultimately depends on the underlying leases of the hospital operators, which in turn are all subsidiaries of KPJ Group. This risk is moderated by the fact that the Properties are viewed as strategically important to KPJ Group as they constitute a substantial part of its operations in Malaysia. The Group’s vested interest in the REIT by virtue of its indirect 37% stake further ensures continued performance and servicing of the terms of the leases. KPJ Group’s financial profile is deemed to comfortably support lease obligations in respect of the transaction.
While all leases between the REIT and KPJ Group are for a 15-year period, the leases of 47.7% of the Properties by market value will expire a month after Issue 2’s expected maturity date. This exposure will increase to 63.6% before the legal maturity date. As the market value of the Properties is mainly driven by the existing leases, asset value may significantly deviate if the leases are not subsequently renewed or lease rates renegotiated. However, non-renewal is seen as remote, given the importance of the assets to the KPJ Group. The hospital operators also undertake to renew the long-term leases upon expiry.
Karin Koh, CFA
(603) 3385 2508
(603) 3385 2577
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Ratings on Al-'Aqar Capital Sdn Bhd