Published on 11 Jan 2021.
RAM Ratings has assigned preliminary ratings to the proposed RM105 mil fourth issue (Fourth Sukuk) under Axis REIT Sukuk Berhad’s (ARSB or the Issuer) RM3 bil Islamic Medium Term Notes Programme (the Programme). The Issuer – wholly owned subsidiary of RHB Trustees Berhad (REIT Trustee for Axis Real Estate Investment Trust) – acts as a sole-purpose funding conduit for the Programme, leveraging on properties owned by the REIT Trustee. Listed since 2005, Axis-REIT has an investment portfolio of largely industrial properties and, to a smaller extent, office properties. The underlying collateral for the Fourth Sukuk will comprise five industrial properties - Axis Aerotech Centre @ Subang (AAC), D37c Logistics Warehouse (D37c), Axis Facility 2 @ Nilai, Axis Shah Alam Distribution Centre 1 and Senawang Industrial Facility (collectively, the Secured Properties), with a combined market value of RM266.70 mil.
Amount of up to
Stressed DSCR (times)
# From issuance date
LTV – loan-to-value
DSCR – debt service coverage ratio
Similar to other commercial real estate-backed transaction structures, profit payments on the sukuk will ultimately stem from rental receipts of the Secured Properties and principal redemption is expected to be met by REIT Trustee either from its own funds, refinancing or disposal of the Secured Properties. The transaction also incorporates structural features and trigger mechanisms to kickstart disposal of the Secured Properties in an orderly manner and divert cashflow to repay sukukholders in order of seniority, if needed, by the Legal Maturity Date.
Unlike ARSB’s last three issuances, two out of the five properties in this transaction are sub-leased (AAC and D37c from main lessor, MAHB and PTP, respectively), accounting for 58.5% of the portfolio’s market value. Security in respect of the sub-leased properties will be in the form of a third-party first-ranking legal charge over Axis-REIT’s registered sub-leases, instead of the Axis-REIT’s legal ownership of land titles, as is the case for the three other Secured Properties. If a Trigger Event or an Event of Default occurs, the Security Agent can enforce the security by way of sale of the registered sub-lease.
The ratings assigned to the Class A, B, C and D Sukuk are underpinned by credit support shown in the transaction’s LTV ratios and DSCRs that correspond to the benchmarks for the respective ratings, based on our RM191.36 mil assessed capital value of the Secured Properties. The assessed value reflects the Secured Properties’ stable cashflow performance and our positive view of their overall characteristics. The Properties are largely general-purpose single-storey warehouses with small office components, located either at well-developed and connected industrial estates, an aerospace park or within a free trade zone. Despite the respective 35- to 46-year remaining sub-lease tenures of the sub-leased properties and limitation on AAC’s usage, the assets are able to command more premium rental rates due to better asset specifications and the limited supply of such quality properties.
Our assessed value of the Secured Properties considers the transaction’s exposure to tenant concentration risk, given the single-tenanted industrial assets, and non-renewal risk as four of the underlying leases will expire ahead of the transaction’s Expected Maturity date. We believe the built-to-suit nature of some of the Secured Properties and their proximity to the tenant’s major client or core operations moderate non-renewal risk. All tenants are part of larger corporate groups or MNCs in various industries, indicating their capacity to meet lease obligations to a certain degree. The lease structures such as the required security deposit and minimum renewal notice period should provide enough lead time for Axis-REIT to seek replacement tenants, as demonstrated in the past.
Any material changes in the underlying assumptions (e.g., property information, transaction structure, cashflow waterfall, salient terms of lease agreements, and principal terms and conditions of the transaction) may result in a change in the preliminary ratings. The assignment of final ratings will be subject to RAM’s satisfactory review of the final transaction documents as well as relevant legal opinions.
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Ratings on Axis REIT Sukuk Berhad (Fourth Sukuk)