RAM Ratings Reaffirms Ratings of Axis REIT Sukuk's RM155 Million Second Sukuk

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1. IB ​ ​Press​ ​Release​ ​Service Published​ ​on:​​ ​IslamicBanker.com​ ​Publications:​ ​https://www.islamicmarkets.com/publications RAM​ ​Ratings​ ​Reaffirms​ ​Ratings​ ​of​ ​Axis​ ​REIT Sukuk's​ ​RM155​ ​million​ ​Second​ ​Sukuk 5​ ​September​ ​2017 RAM​ ​Ratings​ ​has​ ​reaffirmed​ ​the​ ​ratings​ ​of​ ​Axis​ ​REIT​ ​Sukuk​ ​Berhad's​ ​(ARSB)​ ​RM155​ ​million Class​ ​A,​ ​Class​ ​B,​ ​Class​ ​C​ ​and​ ​Class​ ​D​ ​Sukuk​ ​under​ ​its​ ​Second​ ​Sukuk​ ​Issue​ ​(collectively,​ ​the Second​ ​Sukuk);​ ​the​ ​respective​ ​AAA,​ ​AA1,​ ​AA2​ ​and​ ​AA3​ ​ratings​ ​have​ ​a​ ​stable​ ​outlook.​ ​The Second​ ​Sukuk​ ​is​ ​secured​ ​against​ ​4​ ​office​ ​buildings​ ​ ​Menara​ ​Axis​ ​(MA),​ ​Crystal​ ​Plaza​ ​(CP),​ ​Axis Business​ ​Park​ ​(ABP)​ ​and​ ​Quattro​ ​West​ ​(QW)​ ​(collectively,​ ​the​ ​Properties). We​ ​have​ ​reaffirmed​ ​the​ ​ratings​ ​based​ ​on​ ​the​ ​underlying​ ​credit​ ​support​ ​available​ ​for​ ​the transaction,​ ​which​ ​remains​ ​intact​ ​in​ ​spite​ ​of​ ​revisions​ ​to​ ​the​ ​portfolio's​ ​assumed​ ​sustainable cash​ ​flow​ ​and​ ​assessed​ ​stressed​ ​capital​ ​value​ ​of​ ​RM28.5​ ​million​ ​and​ ​RM292.3​ ​million, respectively​ ​(from​ ​RM29.8​ ​million​ ​and​ ​RM305.4​ ​million).​ ​The​ ​revisions​ ​are​ ​premised​ ​on​ ​our​ ​view that​ ​the​ ​portfolio​ ​is​ ​unlikely​ ​to​ ​improve​ ​to​ ​the​ ​levels​ ​we​ ​had​ ​previously​ ​assumed​ ​given​ ​various market​ ​challenges.​ ​The​ ​resultant​ ​cumulative​ ​loan-to-value​ ​ratios​ ​and​ ​debt​ ​service​ ​coverage ratios​ ​of​ ​the​ ​Class​ ​A​ ​to​ ​Class​ ​D​ ​Sukuk,​ ​however,​ ​remain​ ​commensurate​ ​with​ ​their corresponding​ ​ratings. While​ ​there​ ​was​ ​an​ ​improvement​ ​in​ ​the​ ​portfolio's​ ​net​ ​property​ ​income​ ​(NPI)​ ​in​ ​2016,​ ​this​ ​has not​ ​been​ ​sustained​ ​and​ ​remains​ ​below​ ​our​ ​assumptions.​ ​The​ ​Properties'​ ​NPI​ ​edged​ ​up​ ​5%​ ​to RM28.1​ ​million​ ​in​ ​2016​ ​(2015:​ ​RM26.7​ ​million),​ ​underpinned​ ​by​ ​better​ ​average​ ​occupancy​ ​rates (AORs).​ ​Nonetheless,​ ​the​ ​figure​ ​is​ ​still​ ​below​ ​RAM's​ ​assumed​ ​sustainable​ ​cashflow​ ​of​ ​RM29.8 million​ ​and​ ​failed​ ​to​ ​carry​ ​through​ ​to​ ​1H​ ​2017​ ​due​ ​to​ ​a​ ​higher​ ​incidence​ ​of​ ​non-renewed​ ​leases; revenue​ ​dipped​ ​2%​ ​y-o-y​ ​following​ ​a​ ​decline​ ​in​ ​its​ ​AOR​ ​to​ ​75%​ ​(1H​ ​2016:​ ​78%).​ ​Moreover, earlier​ ​expectations​ ​of​ ​increased​ ​car-park​ ​revenue​ ​to​ ​boost​ ​NPI​ ​had​ ​failed​ ​to​ ​materialise​ ​amid competitive​ ​pressures.​ ​We​ ​expect​ ​the​ ​Properties'​ ​NPI​ ​to​ ​be​ ​depressed​ ​in​ ​2017​ ​given​ ​the​ ​higher vacancies​ ​and​ ​persistent​ ​pressure​ ​on​ ​rental​ ​rates​ ​in​ ​order​ ​to​ ​maintain​ ​their​ ​competitiveness​ ​in​ ​a soft​ ​market. The​ ​revised​ ​sustainable​ ​cash​ ​flow​ ​assumption​ ​reflects​ ​our​ ​expectation​ ​that​ ​it​ ​will​ ​take​ ​longer​ ​for the​ ​portfolio's​ ​AOR​ ​to​ ​recover​ ​to​ ​its​ ​historical​ ​levels,​ ​besides​ ​continued​ ​pressure​ ​on​ ​rental​ ​rates. Given​ ​the​ ​market's​ ​demand-supply​ ​imbalance​ ​and​ ​weak​ ​business​ ​sentiment,​ ​the​ ​revision​ ​also reflects​ ​high​ ​renewal​ ​risk​ ​for​ ​the​ ​Properties​ ​in​ ​2019​ ​(about​ ​47%​ ​of​ ​their​ ​leases)​ ​and​ ​the​ ​pressure to​ ​maintain​ ​occupancy​ ​levels​ ​at​ ​competitive​ ​rental​ ​rates.
2. IB ​ ​Press​ ​Release​ ​Service Published​ ​on:​​ ​IslamicBanker.com​ ​Publications:​ ​https://www.islamicmarkets.com/publications We​ ​are​ ​concerned​ ​about​ ​the​ ​prospects​ ​of​ ​ABP​ ​and​ ​QW.​ ​The​ ​AOR​ ​of​ ​ABP​ ​has​ ​been underperforming​ ​our​ ​assumptions,​ ​at​ ​below​ ​70%​ ​over​ ​the​ ​last​ ​3​ ​years.​ ​Although​ ​some​ ​recovery may​ ​be​ ​possible,​ ​we​ ​do​ ​not​ ​expect​ ​it​ ​to​ ​reach​ ​the​ ​levels​ ​we​ ​had​ ​previously​ ​assumed.​ ​We believe​ ​this​ ​will​ ​also​ ​be​ ​true​ ​for​ ​QW,​ ​the​ ​AOR​ ​of​ ​which​ ​has​ ​fallen​ ​to​ ​50%​ ​in​ ​recent​ ​months.​ ​Due to​ ​the​ ​ongoing​ ​construction​ ​of​ ​office​ ​buildings​ ​in​ ​the​ ​immediate​ ​vicinity,​ ​this​ ​property's attractiveness​ ​to​ ​prospective​ ​tenants​ ​has​ ​waned,​ ​exacerbated​ ​by​ ​the​ ​availability​ ​of​ ​additional office​ ​space​ ​in​ ​recent​ ​years. The​ ​REIT​ ​manager​ ​is​ ​in​ ​the​ ​midst​ ​of​ ​negotiations​ ​with​ ​prospective​ ​tenants​ ​to​ ​take​ ​up​ ​the​ ​vacant space​ ​in​ ​the​ ​Properties,​ ​which​ ​may​ ​hasten​ ​the​ ​return​ ​to​ ​earlier​ ​NPI​ ​levels​ ​if​ ​they​ ​are​ ​signed​ ​up earlier​ ​than​ ​expected.​ ​The​ ​resultant​ ​assessed​ ​stressed​ ​capital​ ​value​ ​will​ ​still​ ​be​ ​supportive​ ​of the​ ​transaction,​ ​at​ ​a​ ​29%​ ​discount​ ​to​ ​the​ ​Properties'​ ​latest​ ​market​ ​value​ ​of​ ​RM410.4​ ​million. The​ ​ratings​ ​are​ ​also​ ​underpinned​ ​by​ ​structural​ ​features​ ​that​ ​enhance​ ​the​ ​liquidity​ ​and​ ​security​ ​of the​ ​transactions,​ ​e.g.​ ​minimum​ ​finance​ ​service​ ​coverage​ ​ratio​ ​(FSCR)​ ​requirements​ ​at​ ​the​ ​levels of​ ​both​ ​the​ ​Issuer​ ​and​ ​the​ ​sponsor.​ ​These​ ​act​ ​as​ ​trigger​ ​mechanisms​ ​to​ ​accelerate​ ​recovery​ ​via proceeds​ ​from​ ​the​ ​disposal​ ​of​ ​the​ ​underlying​ ​portfolio.​ ​We​ ​note​ ​that​ ​the​ ​respective​ ​FSCRs​ ​of​ ​the Issuer​ ​vis-a-vis​ ​the​ ​Second​ ​Sukuk​ ​and​ ​Axis​ ​REIT​ ​remained​ ​healthy​ ​at​ ​4.36​ ​times​ ​and​ ​5.67​ ​times as​ ​at​ ​end-December​ ​2016,​ ​i.e.​ ​above​ ​the​ ​covenanted​ ​1.50​ ​times. ARSB​ ​is​ ​a​ ​special-purpose​ ​vehicle​ ​set​ ​up​ ​by​ ​Axis​ ​REIT​ ​as​ ​a​ ​funding​ ​conduit​ ​for​ ​its​ ​Perpetual Islamic​ ​MTN​ ​Programme​ ​of​ ​up​ ​to​ ​RM3​ ​billion.​ ​The​ ​Second​ ​Sukuk​ ​had​ ​been​ ​issued​ ​via​ ​a commercial​ ​real​ ​estate-backed​ ​transaction​ ​involving​ ​the​ ​Properties. Organisation​ ​Name: News​ ​Type: RAM​ ​Rating​ ​Services​ ​Berhad RATING​ ​ANNOUNCEMENT Source: BNM​ ​Announcements Media​ ​Contact Padthma​ ​Subbiah (603)​ ​7628​ ​1162 padthma@ram.com.my
3. IB ​ ​Press​ ​Release​ ​Service Published​ ​on:​​ ​IslamicBanker.com​ ​Publications:​ ​https://www.islamicmarkets.com/publications Disclaimer: 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​ ​analysis​ ​and​ ​commentaries,​ ​where​ ​relevant.