MARC has affirmed its rating of AA- with a stable outlook on Central Impression Sdn Bhd's (CISB) 11-year Fixed Rate Serial Bonds of RM120.0 million. The issuer is a single-purpose company that was established to own and develop the three-storey shopping mall AEON Klebang in Ipoh, Perak. The rating incorporates the strong creditworthiness of the principal tenant, AEON Co. (M) Berhad (AEON), which will lease the whole shopping mall from CISB for an initial tenure of 10 years with an option to extend for a further three terms of five years each. Rental proceeds from AEON, which are captured in the designated accounts, are deemed sufficient to meet the financial obligations under the bond issuance.
The construction of the AEON Klebang shopping mall has been completed and the Certificate of Completion and Compliance (CCC) was received on August 27, 2015. With the CCC issued, construction risk is limited to CISB meeting its construction obligations during the default liability period. Although there was a two-month delay from the initial construction schedule due to slight design changes, the delay had no material impact on project cash flows. The shopping mall, which has a net lettable area (NLA) of about 506,000 sq ft, commenced operations on October 21, 2015, with lease rental fixed at RM18.3 million per annum (RM3.01 psf per month) for the first five years and RM18.7 million per annum (RM3.08 psf per month) for the next five years. During the 10-year lease period, CISB is exposed to termination risk if it fails to meet its obligations under the lease agreement. Although CISB has a limited operating track record in shopping mall property management, MARC regards maintenance risk as moderate given the company's limited obligations with respect to the building's structural aspects, insurance provision and quit rent payments.
MARC's assessment of AEON's credit strength is underpinned by its strong domestic position in the retail industry with 29 department stores, of which 22 are in malls in which AEON is the principal tenant under long-term leases. For the six-month period ended June 2015 (1HFY2015), the retailer generated RM1.9 billion in revenue and a pre-tax profit of RM92.6 million (1HFY2014: RM1.8 billion; RM138.9 million). Profitability during the period was weighed down by higher operating costs, including costs associated with the opening of new stores.
For FY2014, AEON occupied two new malls, opened one new department store and refurbished seven existing department stores at a total cost of about RM670 million. AEON generated RM512.3 million in sublease income from its retail space against an annual lease obligation of about RM180 million in FY2014. While AEON's borrowings increased from RM136.4 million as at end-FY2014 to RM424.4 million as at end-1HFY2015 to support its expansion and refurbishment plans, its capital position has remained strong, with the debt-to-equity ratio standing at 0.23 times at end-1HFY2015 (FY2014: 0.08 times).
Under the terms of the serial bonds, CISB is required to maintain a minimum debt service ratio of 1.50 times. In addition, the company is required to maintain a minimum debt service cover ratio (DSCR) of 1.75 times before any dividend can be distributed. The cash build-up mechanism would enable CISB to meet its scheduled bond redemptions of RM5.0 million per year for the first two years and up to RM15.0 million per year throughout the bond tenure. In addition, the requirement for a full cash build-up of the debt service reserve account (DSRA) prior to the expiry of the initial 10-year lease term mitigates liquidity risk in the event of the lease expiring before the maturity of the bonds. The first bond repayment is scheduled in November 2016.
The stable outlook reflects MARC's expectations that AEON's credit strength will remain supportive to meet its lease obligations.
Contacts: Saifuruddin Othman, +603-2082 2245/ saifuruddin@marc.com.my; Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.
© Press Release 2015
