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Press Release
28 Mar | Tuesday
RAM Ratings assigns final ratings to Quill Retail Malls’ RM350 million Sukuk Murabahah
RAM Ratings has assigned respective final ratings of AA1/Stable, AA3/Stable, A2/Stable and A3/Stable to Quill Retail Malls Sdn Bhd’s (QRMSB) RM200 million Class A, RM70 million Class B, RM50 million Class C and RM30 million Class D Sukuk Murabahah. The issues are part of QRMSB’s plan to partly refinance the outstanding RM420 million MTN issued under its RM850 million CP/MTN programme established in 2013. The MTNs are secured against a first legal charge over Quill City Mall (the Mall or the Property), the primary security for the transaction.
 
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 its legal maturity. Based on RAM’s assessed adjusted valuation of the Property of RM595 million, the respective loan-to-value (LTV) ratios of 33.6%, 45.4%, 53.8% and 58.8% provide adequate credit support for the ratings assigned to the Class A, Class B, Class C and Class D Sukuk Murabahah. We highlight that our assessment of the Property’s adjusted valuation considers the characteristics of the underlying asset, its short operating history of about 2 years and the asset outlook for Quill City Mall. It also takes into account the subdued retail outlook and asset performance stress given the competitive retail environment. As the disposal of the Property is the ultimate recourse for the sukuk holders, the transaction incorporates predefined trigger events to initiate the sale.
 
With a performance history of only 2 years, the transaction’s periodic obligations are envisaged to be met through the Property’s cashflow and an irrevocable and unconditional bank guarantee (BG) of up to RM50 million. Based on its 2016 performance, the Mall achieved a net property income of RM19.2 million (unaudited) with weak operating cashflow as tenant collections stayed slow; rental receivables stood at 30% of gross rental revenue, reflecting collection challenges. In this regard, we view the BG as an important feature to the continued performance of the transaction, to mitigate the Property’s weak operating cashflow as a result of slow rental collections.
 
Under RAM’s stressed expectations, we believe that the RM50 million BG limit should be sufficient to ensure continued timely payments of profit obligations under the Sukuk Murabahah up to legal maturity. Furthermore, the transaction’s conservative trigger thresholds for minimum cashflow performance further support the transaction’s overall performance, particularly in the initial years in view of the unseasoned property profile amid a challenging retail environment. Additionally, we understand that QRMSB recently tightened its credit practices, which should further improve rental collections. Meanwhile, the Mall faces significant tenant-concentration risk, given that its single largest anchor tenant AEON Co (M) Berhad occupies 32% of net lettable area (NLA), and its lumpy lease-maturity profile has a substantial 81% of occupied NLA becoming due for renewal in 2017.
 
QRMSB is a member of the Quill group of companies (Quill Group), 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, and 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.
source: RAM Rating Services Berhad
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