RAM Ratings has affirmed the AAA/Stable rating of IGB REIT Capital Sdn Bhd's RM1.2 bil Second Tranche Medium-Term Notes (MTN), the second issuance under the RM5.0 bil MTN Programme secured against Mid Valley Megamall (the Mall or the Property). IGB REIT Capital is a special-purpose vehicle created by IGB Real Estate Investment Trust (the REIT) for fundraising purposes.

The affirmation it said reflects Mid Valley Megamall's continued solid performance. With RAM's sustainable cashflow (SCF) assumption and the applied capitalisation rate maintained at RM290 mil and 8.0%, respectively, the resultant adjusted valuation of RM3.63 bil for the Mall provides strong credit support for the Second Tranche MTN, as reflected in the loan-to-value ratio of 33.1% and stressed debt service coverage ratio of 2.84 times.

In FY Dec 2023, the Mall's net property income (NPI) grew 5.8% y-o-y to RM325.8 mil, supported by near-full occupancy and an improved average rental rate. The better performance was due mainly to strong footfall and robust consumer spending. Occupancy dropped temporarily to 88.1% as at end-June 2024 in view of the reconfiguration of Mid Valley Megamall's South Court following Metrojaya's downsizing in February 2024. With the entire exercise expected to be completed by the end of this year and new tenants secured for the vacated space, occupancy is envisaged to recover to near-full levels. For 1H 2024, the Mall had achieved an NPI of RM171.1 mil.

Going forward, RAM said the Mall's performance may see some volatility due to inflationary pressures, particularly from the impending RON95 fuel subsidy rationalisation that will likely affect consumer spending. In FY Dec 2023, variable rent—comprising percentage rent, car park income, and promotional income—accounted for 26% of total revenue. While management aims to secure higher base rents for expiring tenancies, they plan to maintain variable rent at current levels. This strategy may gradually reduce exposure to variable rent, though the current proportion still leaves the Mall vulnerable to near-term volatility. Additional expenses are expected to be incurred for refurbishments and infrastructure upgrades over the next few years, given the age of the Mall. We have nevertheless maintained our SCF assumption of RM290 mil for now and will reassess this figure when a sustained performance becomes more evident.

The issue rating is also underpinned by the transaction's structural features and financial covenants that would initiate the disposal of the Mall upon the occurrence of a trigger event while ongoing coupon obligations on the Second Tranche MTN are met. This includes performance triggers at both the REIT and the Mall levels as well as the failure to redeem the Second Tranche MTN at expected maturity, among other events. RAM said it believes Mid Valley Megamall's cashflow performance and the transaction's cash reserve provide adequate buffers to facilitate an orderly disposal of the Property to meet the redemption of the Second Tranche MTN by the legal maturity date if required.