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RAM Ratings reaffirms ratings of Axis REIT's MYR 155 million Second Sukuk

August 18, 2014

RAM Ratings has reaffirmed the respective AAA, AA1, AA2, and AA3 ratings of Axis REIT Sukuk Berhad's (ARSB or the Issuer) MYR 155 million Class A to Class D Sukuk under its Second Sukuk Issue; all the ratings have a stable outlook.

"ARSB is a special-purpose vehicle set up by Axis Real Estate Investment Trust (Axis REIT) as a funding conduit for its 15-year Islamic MTN Programme of up to MYR 300 million (Sukuk Programme). The Second Sukuk had been issued via a commercial real estate-backed transaction involving four office buildings in the suburbs of Petaling Jaya (the Properties or the Portfolio), with a combined latest market value of MYR 384.6 million (2013: MYR 373.7 million).

"The ratings remain supported by commensurate loan-to-value (LTV) ratios and stressed debt service coverage ratios (DSCRs), based on RAM's assessment of the sustainable value of the Properties. Several structural features also strengthen the transaction. The sustainable capital values of the Properties reflect their above-average quality due to their strategic locations. Based on data for the eight month period from August 2013 to March 2014, the transaction performed in line with our sustainable–cashflow assumptions. As part of the trigger mechanisms, the transaction also imposes minimum performance covenants on ARSB and Axis REIT. For FY Dec 2013, the finance service coverage ratios (FSCRs) of both entities remained healthy at 5.19 times and 6.03 times, respectively.

"The above mentioned strengths are, however, moderated by the Portfolio's lack of asset diversity, somewhat lumpy maturity profile and tenant concentration. Given the soft office property market, we believe that any significantly positive rental reversion will be limited in the near term. We note that there are currently significant gaps in the Portfolio's tenanted space. A respective 14.3 per cent and 4.6 per cent of the Portfolio's total space were vacated in Axis Business Park and Crystal Plaza in January and June 2014. Despite the current tenancy voids, the Properties' FSCR is still estimated to come up to 4.32 times under our assumptions, i.e. more than sufficient to cover the profit obligations under the Second Sukuk.

"Overall, we expect the Properties' occupancy rates to recover in the short term, despite the overhang in the office market. Our view is supported by the Properties' competitive rental rates and strategic locations as well as the management's proven track record in securing tenants. In the interim, the management has also embarked on asset-enhancement initiatives for Axis Business Park, to increase its appeal. The refurbishment exercise is expected to be completed by the end of this year/early 2015. That said, RAM will monitor the Portfolio's performance on a quarterly basis."

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Source: CPI Financial

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