Published on 03 Jul 2020.
RAM Ratings has reaffirmed the respective AAA/Stable, AA3/Stable and AAA/Stable ratings of Lucida Capital Berhad’s (the Issuer) Senior Class A MTNs, Senior Class B MTNs (collectively, the Senior MTNs), and Stand-Alone Class C MTNs.
As the ultimate repayment of the Senior MTNs depends on the sale of the collateral – the Quill 6 office building – the Senior MTNs’ ratings reflect the credit support provided by the property. The reaffirmation of the Senior MTNs’ ratings also factors in the Issuer’s undertaking to limit the issue amount of Senior Class A to RM52 mil, which keeps the Senior MTNs’ loan-to-value (LTV) ratios within levels that commensurate with their ratings. This is despite a downward revision of RAM’s adjusted valuation on Quill 6 from RM145 mil to RM116 mil, which is 42% lower than the property’s appraised market valuation of RM200 mil in May 2020.
Meanwhile, the reaffirmation of the Stand-Alone MTNs’ rating continues to reflect HSBC Bank Malaysia Berhad’s (HSBC Malaysia) AAA/Stable rating, as cashflow for the payment of the Stand-Alone MTNs’ principal and coupons is derived from lease payments from the bank – Quill 6’s sole tenant.
Our revised adjusted valuation reflects our view of decreasing liquidity in the office property market, as evidenced by the dearth of transactions in recent years. This factor will become more crucial as the Senior MTNs move closer to expected maturity in March 2021. Compounding the risk is the expiry of the master lease in March 2022 and the gradually widening supply-demand gap in the Kuala Lumpur office market, which will exert pressure on occupancy, rental rates and capital value.
Based on the outstanding RM45 mil of Senior MTNs (entirely from class A) presently, the corresponding LTV ratio of 38.7% and stressed debt service coverage ratio (DSCR) of 3.76 times provide more than sufficient credit support for the current ratings. Assuming full drawdown, subject to the RM52 mil issue limit, the Senior Class A and B MTNs’ respective LTV ratios of 44.7% and 55.9% and stressed DSCRs of 3.26 times and 2.61 times would remain supportive of the ratings. That said, we understand that the Issuer does not intend to issue any additional MTNs.
Quill 6’s performance has stayed stable, underscored by prompt lease payments from HSBC Malaysia and within-budget capital expenditure for the property. The property’s net property income improved to RM14.8 mil in fiscal 2019 (fiscal 2018: RM13.3 mil), in line with our expectations and attributable to a rental step-up effective April 2019, in accordance with the lease agreement.
HSBC Malaysia’s new headquarters at Tun Razak Exchange (TRX) is currently under construction and scheduled for completion in December 2020, not taking into account the cessation of construction works while the Movement Control Order was in place. The bank had reportedly put up for sale Menara HSBC South Tower, which is annexed to Quill 6 and together with the latter houses its current head office. While there have been no details on the timing of the bank’s relocation to TRX, HSBC Malaysia might not extend its tenancy in Quill 6 after the initial fixed term of its lease ends in March 2022. Even without assuming any cash inflow after March 2022, the transaction’s accumulated cash balance provides sufficient liquidity to ensure continued servicing of the Senior MTNs’ coupon obligations until legal maturity in September 2022, should the transaction enter its tail period.
Lim Chern Yit
(603) 3385 2528
(603) 3385 2577
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Ratings on Lucida Capital Berhad