RAM Ratings has reaffirmed the AAA/Stable rating of the outstanding RM70 mil Class A1 Sukuk under Axis REIT Sukuk Berhad's (ARSB) Second Sukuk Issue (the Second Sukuk). The Second Sukuk is secured against four office buildings Menara Axis, Crystal Plaza, Axis Business Park and Quattro West (collectively, the Properties).
The reaffirmation of the rating is premised on the ample credit support provided by the securitised portfolio following the redemption of Class A2 to D Sukuk on 15 August 2018. This is reflected in the transaction's still low LTV of 27.8%, despite the revision of the portfolio's assumed sustainable cashflow and assessed adjusted valuation of RM24.6 mil and RM252.1 mil, respectively (from RM28.5 mil and RM292.3 mil, respectively). The revision was prompted by weak recovery of the portfolio and our view that its net property income (NPI) performance is unlikely to return to levels we had previously assumed, given the challenging office property market. The resultant loan-to-value and debt service coverage ratios remain commensurate with the rating.
Over the review period, the portfolio's NPI for FY Dec 2018 stayed below our sustainable cashflow assumption, declining 7.4% y-o-y to RM24.1 mil. This was primarily attributed to the portfolio's lower average occupancy rate and average rental rate of 70.0% and RM3.94 (2017: 72.2% and RM3.99), respectively, particularly owing to space reduction and non-renewal of leases by major tenants at Menara Axis. The impact of this, however, was partially cushioned by the better performance of Crystal Plaza. That said, its performance is anticipated to recover by end-2019 due to the commencement of new leases in 2H 2019.
The rating is further underpinned by structural features that enhance the liquidity and security of the transaction, such as minimum finance service coverage ratio (FSCR) requirements at both issuer and sponsor levels. These act as trigger mechanisms to accelerate recovery via proceeds fromeposal of the underlying portfolio. We note that the Issuer's respective FSCRs vis-a-vis the Second Sukuk and Axis REIT remained healthy at 8.28 times and 3.48 times as at end-December 2018 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 bil. The Second Sukuk was issued via a commercial real estate-backed transaction involving the Properties.
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