Murud Capital Sdn Bhd - 2015

MARC has assigned ratings of MARC-1/AA to Murud Capital Sdn Bhd’s (Murud Capital) Senior Commercial Papers/Medium Term Notes (CP/MTN) Programme of up to RM290 million. The outlook on the ratings is stable. The Senior CP/MTN Programme will be established alongside an unrated subordinated Junior CP/MTN Programme of up to RM450 million. The combined limit of both the Senior and Junior CP/MTN Programmes (collectively referred as the CP/MTN Programmes) is capped at RM450 million. The CP/MTN Programmes will have expected and legal maturities of five years and seven years respectively from the date of first issuance.

Murud Capital is a bankruptcy remote special purpose vehicle of Quill Capita Trust (QCT) and will issue Senior CP/MTN and Junior CP/MTN under the CP/MTN Programmes. Proceeds from the issuance will be advanced to parent QCT to part finance the acquisition of Platinum Sentral from MRCB Sentral Properties Sdn Bhd. Platinum Sentral is a commercial building consisting of five blocks of four- to seven-storeys with two levels of car parks located in the KL Sentral hub. The building has 419,643 sq ft of net lettable office space and 56,214 sq ft of net lettable retail space, both of which recorded full occupancy as at February 10, 2015. Platinum Sentral generated a net operating income (NOI) of RM42.0 million with a weighted average rental rate of RM8.28 per sq ft in 2014.

The ratings reflect the adequacy of collateral coverage on the Senior CP/MTN Programme with loan-to-value (LTV) ratio in line with the rating agency’s requirements for MARC-1/AA ratings. Under its income capitalisation approach, MARC has assumed a stabilised NOI of RM43.7 million throughout the tenure of the CP/MTN Programmes on expectations of rental improvement over the intermediate term to derive Platinum Sentral’s valuation at RM567.5 million. MARC’s conservative collateral valuation represents a 23.3% discount to the fair value of RM740 million as appraised by an independent valuer as at September 15, 2014.

The ratings are also supported by the quality of the collateral on account of the property’s favourable location and strong tenancy base, underpinned by secured lease agreements from government-linked entities. The strong occupancy rate for the office component compares favourably with the prevailing industry occupancy rate of 79.1%. This notwithstanding, Platinum Sentral is exposed to high tenant concentration risk as three tenants occupy about 80.5% of the net lettable space (excluding licensed area/outdoor/terrace). MARC draws comfort from the low credit risk of the three major tenants, namely government-linked entities (Small and Medium Enterprise Corporation Malaysia and Suruhanjaya Pengangkutan Awam Darat) and a multinational oil and gas corporation (SBM Offshore Sdn Bhd).

The lease agreements of the collateral property, ranging from three to 15 years, offer cash flow stability to support Murud Capital’s debt service obligations. MARC notes that a significant portion of the short-term tenancies, accounting for 24.1% of net lettable office space, will expire in 2015. While management is in the midst of renewal negotiations, MARC believes the renewal risk is mitigated by Platinum Sentral’s good location and building design, as well as the established management track record of the real-estate investment trust manager, Quill Capita Management Sdn Bhd. The provision for rental revision at the end of every three-year contract in the office component provides potential upside to rental revenues going forward.  

The CP/MTN Programmes are secured by a third party first ranking legal charge on Platinum Sentral. The monthly rental collections from tenants of the collateral property will form the source of debt service for the CP/MTN Programmes. Additional structural protections for the CP/MTN holders are the requirements to maintain minimum debt service coverage ratio and security coverage ratio of 1.50 times and 1.40 times respectively. The programmes are however non-amortising with the principal repayment expected to be funded by refinancing or from proceeds from the disposal of Platinum Sentral. MARC notes that the refinancing risk is addressed by the two-year tail period between expected and legal maturities of the CP/MTN Programmes which should allow sufficient time for disposal of the collateral property by the Security Trustee. In respect of the rollover risk of the Senior CP/MTN Programme, the risk is mitigated by the underwriting commitment for the Senior CP of up to RM290 million. 

Strengths

• Substantial security coverage;
• Strategic location of collateral property in the Kuala Lumpur Sentral commercial hub; and
• Government-linked entities as major tenants provide rental stability.

Challenges/Risks

• High tenant concentration risk;
• Pressure on rental rates arising from the increasing supply of office space; and
• Refinancing of commercial papers/medium term notes at expected maturity.