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Press Release
13 Jun | Wednesday
RAM Ratings reaffirms ratings of Quill Retail Malls’ RM350 million Sukuk Murabahah

RAM Ratings has reaffirmed the respective AA1, AA3, A2 and A3 ratings of Quill Retail Malls Sdn Bhd’s (QRMSB or the Issuer) RM200 million Class A, RM70 million Class B, RM50 million Class C and RM30 million Class D sukuk under its RM350 million Sukuk Murabahah (2017/2024) facility. The ratings each carry a stable outlook. The transaction is secured against Quill City Mall (QCM or the Mall or the Property) – the retail portion of ultimate sponsor Quill Group’s Vision City development.

The reaffirmation of the ratings is premised on the still adequate collateral coverage provided by QCM amid ongoing developments in its tenant profile and business strategy. We believe RAM’s adjusted valuation of RM750 psf (or RM583 million, 2% lower from the previous RM595 million due to changes in the Mall’s NLA) is reasonable vis-a-vis recently transacted prices and the Mall’s recently assessed market value of RM830 million. Despite a 41% drop in net property income from higher operating expenses and lower revenue – average rents fell by 3% to maintain QCM’s 78% occupancy – in FY Dec 2017, stronger than expected support from the Sponsor during the review period (rental backstops and advances increased by almost threefold y-o-y) had left the transaction’s bank guarantee (BG) facility and Finance Service Reserve Account (FSRA) untapped during the review period. RM60 million of the sukuk held by the transaction’s ultimate shareholders had also been effectively converted into subordinated advances in April 2018, reducing the transaction’s overall leverage and ongoing profit obligations. These factors, combined, will help maintain the required liquidity support for the transaction, especially during the Property’s transition period.

Following the signing of a major lease with Asia Music City Sdn Bhd (AMC or the Company), QCM’s management team has commenced plans to reposition the Mall, with renovations and changes to its tenant mix. QCM’s current anchor tenant, AEON Co. (M) Bhd, will progressively handover 81% of its tenanted net lettable area (NLA) to the management, which will then be reconfigured and converted into higher yielding specialty stores. After the expected completion of the renovation and repositioning exercise by 1Q 2019, the Property’s total NLA will shrink 12% to 681k sf from 778k sf (2% down from 794k sf due to NLA re-measurements and more common area following AMC’s fit-out works), as lettable space will also be converted into common areas. The management anticipates the Mall’s F&B and entertainment tenant mix to be better diversified as a result of the repositioning, which would increase QCM’s attractiveness and ability to draw footfall, based on its current catchment profile – young single professionals.

QCM’s management expects AMC, which will be the Property’s largest tenant with 16% of total NLA post-repositioning, to give the Mall a first-mover advantage in the music and lifestyle entertainment niche. AMC has the technical expertise of UnUsUaL Productions Pte Ltd (a subsidiary of UnUsUaL Limited), which will provide support in organising concerts and events for the Company. Having been operational since 1997, UnUsUaL Limited has one of the largest audio-visual inventories in Singapore and is a key promoter of concerts in Southeast Asia. AMC currently has a confirmed line-up of events for the next two years. This is anticipated to drive footfall at the Mall, which could spill over into better sales performances for the Mall’s other tenants. Based on management’s expectations, AMC will become the Property’s largest revenue generator, making up around 15% of total revenue (and the bulk of turnover rent revenue) going forward.
 
QCM’s exposure to market risk will, in our view, increase considerably after fit-outs are completed, with turnover rent making up at least 20% of total revenue (from 2% previously). Tenant concentration risk will accordingly be more pronounced with AMC as the largest rental contributor. Further, the Company’s ‘retailtainment’ concept is untested in Malaysia and may require time to gain public awareness. Specifically, RAM believes AMC’s ability to reach its targeted audience will also depend on its overall pricing strategy. That said, we believe the new centre management team, whose members have at least 10 years of experience with reputable property managers, to be able to execute the repositioning exercise. QCM’s NPI is expected to rebound to RM34 million over the next 3 years, though we anticipate some volatility in the Mall’s performance during its maturation period post-repositioning.

To address liquidity concerns during the renovation of the Property, the transaction’s ultimate shareholders have undertaken to commit capital support of RM2 million, with an additional RM10 million if required (which was not factored into our assessment). This, coupled with the undrawn BG facility and FSRA amounts, will provide adequate liquidity support to ensure continued servicing of the Issuer’s periodic obligations until legal maturity of the sukuk. 

QRMSB is a member of the Quill Group, established in 1988 by ultimate shareholders Dato’ Jennifer Low and Dato’ Michael Ong. Quill Group is a multi-disciplinary property group, which recently diversified into luxury vehicles and health services.

Analytical contact
Chin Jin Han
(603) 7628 1168
jinhan@ram.com.my
 
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

Date of release: 13 June 2018

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 2018 by RAM Rating Services Berhad

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