[RAM] RAM Ratings reaffirms ratings of Quill Retail Malls' RM350 mil sukuk, maintains negative outlook

RAM Ratings has reaffirmed the respective ratings of Quill Retail Malls Sdn Bhd’s (the Issuer) RM350 mil Sukuk Murabahah (2017/2024), with a negative outlook (table below). The rating reaffirmation is premised on the collateral support for the sukuk, as reflected by the loan-to-value (LTV) ratios which remain commensurate with the respective ratings. RAM has maintained the adjusted valuation of Quill City Mall (the Mall or the Property) at RM544.4 mil or RM700 psf, representing 65.8% of the latest appraised valuation of RM830 mil. We consider this to be appropriate level still, after considering observed values of similar properties transacted in the market and current market conditions.

The negative outlook reflects our concerns over the challenges faced by the Property to achieve a meaningful turnaround in performance in the near-term. The weak outlook for the retail property segment and fragile operating conditions wrought by the pandemic further add to the challenges if a property sale is triggered. Investors' interest will be stronger for established and resilient retail properties given the weak market and more conservative lending conditions. However, we view the newly completed/under construction residential developments in its immediate vicinity and redevelopment of Kampung Baru might provide positive upside for its longer-term prospects. The sponsor’s continued financial support, transaction’s available RM50 mil undrawn facility and cash reserves ensure continued servicing of the sukuk profit obligations and senior costs up to the legal maturity date.

In FY Dec 2020, the Mall’s net property income fell to its lowest level to RM0.29 mil (2019: RM0.73 mil) owing to rental rebates to assist tenants and maintain occupancy during the various phases of movement restrictions. This was despite the improvement in its average occupancy. During the year, AEON Co (M) Bhd ceased its operations at the Mall while JDX Presto Concept Store downsized its occupied area by 25% (collectively, a reduction of 10% of total occupied area). Nonetheless, the vacated space was subsequently leased to NSK Trading Sdn Bhd (supermarket operator) and Magica Victory Sdn Bhd (banquet operator). Based on newly committed leases, the Property’s occupancy will improve to above 80% by end-Dec 2021 from 77% as at end-Dec 2020. We understand that the management is reviewing the need for further rental rebates in view of MCO 3.0.

Going forward, the Mall’s performance is envisaged to stay uncertain in view of the challenges faced in turning around the Mall. As at end-Dec 2020, approximately 13% of the Mall’s total gross rental income was derived from turnover rent, which is highly sensitive to the imposition and duration of movement restrictions. With less than nine months to the transactions’ expected maturity date, we understand that the sponsor has already begun discussions to explore options for a possible refinancing of the Sukuk, although these remains preliminary, at this stage. 

The sukuk is secured against Quill City Mall, a 780,026 sf shopping mall located along Jalan Sultan Ismail in Kuala Lumpur, with accessibility from the Medan Tuanku Monorail Station. The Issuer is a member of the Quill Group, which was established in 1988 by ultimate shareholders Dato’ Jennifer Low and Dato’ Michael Ong. Quill Group is a multi-disciplinary group involved in property development and investment, distribution of luxury vehicles, and health services.

Analytical contact
Lim Chern Yit
(603) 3385 2528

Tan Han Nee
(603) 3385 2529