News Column

RAM Ratings reaffirms ratings of Al-'Aqar Capital's MYR 655 million Sukuk Ijarah

May 24, 2014



RAM Ratings has reaffirmed the respective AAA/Stable and AA2/Stable ratings of Al-'Aqar Capital Sdn Bhd's MYR 272 million Class A and MYR 55 million Class B Sukuk Ijarah. Al-'Aqar Capital is a special-purpose vehicle incorporated by Al-'Aqar Healthcare REIT (the REIT) to issue Islamic securities under an MYR 1 billion Islamic MTN Programme (the Programme). This is the first issuance (Issue 1) under the Programme and is backed by 19 hospitals and two nursing colleges (collectively, the Properties), valued at MYR 1.17 billion as at end-December 2013.

The reaffirmation is premised on the debt service coverage as well as loan-to-value ratios that commensurate with the respective ratings. The transaction's structural features and the stable lease payments from the hospital operators are other rating drivers. In FY Dec 2013, the MYR 81.7 million of rental income derived from the Properties remained satisfactory against our assumed lease payments of MYR 78.2 million per annum. We note that the leases that were due for renewal in 2013 have been renewed for another three years, as per the terms of the lease agreements. The renewed leases have resulted in a higher rental income due to the higher yields on 10-year MGS.

RAM highlights that the primary source of funds for the Issuer to meet its obligations under Issue 1 will be the rental income from the REIT, which in turn depends on the underlying lease payments from the hospital operators. In this regard, the transaction is exposed to significant single-counterparty risk as all the operators of the Properties are subsidiaries of KPJ Healthcare Berhad (KPJ Group or the Group). RAM believes that the group should be able to meet its lease obligations without difficulty, as reflected by its ratio on operating profit before depreciation, interest, tax and rental against lease payments to the REIT of 2.9 times. Furthermore, the group's vested interest in the REIT and the strategic importance of the hospitals to KPJ Group's operations provide a strong incentive to ensure the continued performance of the transaction.

Meanwhile, the unrated Class C Sukuk Ijarah has a one-off option for early partial redemption a year from the issuance date, using disposal proceeds from the REIT's other assets. We understand that the REIT intends to exercise this option to redeem approximately MYR 90 million of the unrated Class C Sukuk, using the MYR 112 million of proceeds from the sale of Selesa Tower. Given the delay in completing the sale, the Issuer had obtained the sukuk holders' approval to extend the partial-redemption option from 6 May to 6 November 2014. Following that, the remaining outstanding Class C Sukuk Ijarah can only be redeemed on the expected maturity date of Issue 1, in order of seniority.

In April 2014, the amalgamation of KPJ Ipoh Specialist Hospital (KISH) and Puteri Specialist Hospital's (PSH) land titles were submitted to the local land office. To date, the amalgamation exercise for PSH has been completed while the one for KISH is expected to be completed in three months. While the overall credit support for the transaction remains intact, we note the transitory risk relating to the transfer/perfection of charges during the three-month period. This risk is, however, moderated to some extent as the right to deal with the affected titles only resides with authorised third parties, i.e. the appointed legal counsel, the land office and the Security Trustee, during the amalgamation process and represents only 9.4 per cent of the Portfolio's value. In addition, Al-'Aqar Capital and the REIT have a negative pledge on dealing with the securitised assets.

That said, the development plans for the amalgamated land may introduce added complications to the disposal of the affected security. As it is, the specialised and illiquid nature of hospitals renders them harder to sell as potential buyers are likely to be limited to other hospital operators. We understand that other Properties may undergo similar amalgamation as KPJ Group seeks to upgrade and expand its current facilities, deviating from the mature and stable nature of underlying assets commonly seen in similar transactions. We are cautious about such developments and will maintain close monitoring and assessment of the impact from KPJ Group's future expansion plans on the transaction.


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Source: CPI Financial


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