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06 May | Monday
Ratings of Al-‘Aqar Capital’s RM575 million Issue 2 Sukuk Ijarah reaffirmed

RAM Ratings has reaffirmed the respective AAA/Stable and AA2/Stable ratings of Al-‘Aqar Capital Sdn Bhd’s (Issuer) RM295 million Class A and RM60 million Class B Issue 2 Sukuk Ijarah under its RM1 billion IMTN Programme. The reaffirmation is premised on our expectations that the underlying hospitals secured under Issue 2 (the Properties) will continue to maintain stable performances, supported by the long-term lease arrangement with KPJ Healthcare Berhad (KPJ Group). Al-‘Aqar Capital is a wholly owned special-purpose vehicle of Al-‘Aqar Healthcare REIT, specifically incorporated to raise funds by issuing Islamic securities via commercial real estate-backed transactions.

The 19 hospitals’ total rental income of RM85.5 million for FY Dec 2018 was in line with our annual sustainable cashflow assumption of RM85.0 million. Accordingly, the available credit support for the respective AAA and AA2 ratings remained adequate, as reflected in the loan to value ratios of 38.2% and 45.9% and stressed finance service coverage ratios of 2.37 times and 2.25 times. As at end-December 2018, the Properties’ combined market value appreciated by a marginal 2.36% y-o-y to RM1.23 billion. The collateral is viewed as well diversified in terms of asset size, location, and multi-disciplinary medical services as it includes large established hospitals and mid-sized community medical centres. Most of the Properties are in established urban areas such as Kuala Lumpur, Selangor and Johor. During the review period, the transaction comfortably met all required financial covenants at both the issue and REIT levels.

That said, various new developments and land title exercises undertaken by KPJ Group in respect of the Properties leave the ratings vulnerable, although this risk is presently deemed manageable. RAM highlights that any disposal prior to the completion of the new developments and/or land title exercises may compromise the overall quality of the security package as it could complicate the transfer and disposal of the Properties, delaying the process beyond the two-year tail period. The smaller proportion of properties (14.1% as at end-February 2019 compared to 20.0% at financial close last year) undergoing new development and land title exercises has significantly alleviated our concerns over potential hitches during the disposal of the properties, if required. Going forward, we expect any new initiatives to be managed prudently without affecting the integrity of the transaction structure.

The transaction is also exposed to significant single-counterparty risk as the Issuer’s ability to meet its obligations under Issue 2 ultimately depends on the underlying leases of the hospital operators, which in turn are all subsidiaries of KPJ Group. This risk is moderated by the fact that the hospitals under Issue 2 are viewed as strategically important to KPJ Group as they constitute a substantial part of its operations in Malaysia. The Group’s vested interest in the REIT via its indirect 42% stake further ensures continued performance and servicing of the terms of the lease.

While all leases between the REIT and KPJ Group are long-term for a 15-year period, the leases of nearly half of the Properties by market value will expire a month after Issue 2’s expected maturity date. This exposure will increase to 63.5% before the legal maturity date. As the market value of the Properties is mainly driven by the existing leases, asset value may significantly deviate if the leases are not subsequently renewed or lease rates renegotiated. However, non-renewal is seen as remote, given that the assets are part of the KPJ Group’s core business operations. The commitment of the hospital operators is reinforced by their undertaking to renew their long-term leases upon expiry.

Analytical contact
Lim Chern Yit
(603) 3385 2528
chernyit@ram.com.my
 
Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 Date of release: 6 May 2019

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 2019 by RAM Rating Services Berhad

 
 
 
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