Published on 26 Aug 2020.
RAM Ratings has reaffirmed the AAA/Stable rating of the first issuance (2019-Issue 1 MTN) of RM210 mil Class A Medium Term Notes (MTN) under KIP REIT Capital Sdn Bhd’s (the Issuer) RM2.0 bil perpetual MTN Programme (the Programme). The underlying collateral for 2019-Issue 1 MTN comprises KIPMall Tampoi (KMT), KIPMall Masai (KMM), KIPMall Bangi (KMB) and AEON Mall Kinta City (AMKC) (collectively, the Properties; excluding AMKC, the KIPMalls). The Properties’ combined market value stood at RM678.0 mil as at 30 June 2020.
The rating reaffirmation is underpinned by our assessment of the Properties’ credit characteristics and performance as well as the transaction’s structure and liquidity position. As we have maintained our sustainable cashflow assumption of RM50 mil and valuation of the Properties of RM570.82 mil, the resultant loan-to-value ratio of 36.79% and stressed debt service coverage ratio (DSCR) of 2.85 times continue to provide comfortable credit support for the Class A Notes, commensurate with an AAA rating. Although the Properties’ cashflow may be softer in the interim, the Issuer has more than sufficient liquidity to fully meet senior costs and coupon payments in respect of the Class A Notes, with a DSCR of 3.66 times as at end-June 2020.
Compared against the impact of Covid-19-induced rental relief measures on some other commercial real estate-backed transactions rated by RAM, the Properties’ net cashflow decline was observed to be less material at -7.2% y-o-y, with cashflow coming in at RM47.0mil in FY Jun 2020. This is attributable to the KIPMalls’ higher exposure to the fresh market/supermarket trade sectors, focusing on basic necessities, compared to bigger lifestyle malls, therefore suffered less disruptions during the movement control order. AMKC’s long-term lease agreement (expiring in September 2025) with a reputable master tenant, AEON Co (M) Bhd, also provides the Properties with better cashflow stability to some degree. Lease renewal negotiations at the KIPMalls have been positive to date, with over 90% of tenants renewed their leases, although at flattish reversion rates.
That said, downside risks remain for the near term, particularly with KMM having over 90% leases, by rental income, due for renewal in FY Jun 2021. However, a majority of the tenants have stayed with the mall for more than three rental cycles. We also expect a longer gestation period for KMB to see results from its ongoing tenant reconfiguration exercise. Accelerated adoption of online shopping, weaker consumer purchasing power and the lifting of a six-month loan moratorium at end-September 2020 could worsen the performance of the Properties. Our stress test indicates that the Properties’ net cashflow may continue to hover at the current level for the next one to two fiscal years before recovering to RM50 mil by FY Jun 2023.
The Issuer – a wholly owned subsidiary of KIP Real Estate Investment Trust (KIP REIT or the REIT) – was set up as a funding conduit for the sole purpose of facilitating the fundraising exercise via the proposed Programme, to be secured against properties owned by the REIT. KIP REIT, which was listed in February 2017, was initiated as a trust that focuses on an investment portfolio of community-centric retail centres.
Chu Jia Ying
(603) 3385 2519
(603) 3385 2577
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2020 by RAM Rating Services Berhad
Ratings on KIP REIT Capital Sdn Bhd (Issue 1)