MURUD CAPITAL SDN BHD - 2016

MARC has affirmed its ratings of MARC-1/AA on Murud Capital Sdn Bhd’s (Murud Capital) Senior Commercial Papers/Medium-Term Notes Programme (Senior CP/MTN Programme) of up to RM290 million. The outlook on the ratings is stable. Murud Capital currently has an outstanding RM279 million Senior CP under the Senior CP/MTN Programme while there are no outstanding issuances under the unrated Junior CP/MTN Programme of up to RM450 million.

Murud Capital is wholly-owned by MRCB-Quill REIT (formerly known as Quill Capita Trust), a real estate investment trust which owns a portfolio of commercial buildings including Platinum Sentral which comprises five blocks of four- to seven-storey commercial buildings located within the Kuala Lumpur Sentral hub. The Senior CP/MTN programme is secured by a third party first legal charge over Platinum Sentral. The ratings reflect the adequate collateral coverage with a loan-to-value (LTV) ratio of 49.2% which is within MARC’s LTV ratio requirement of 52.0% based solely on the outstanding Senior CP. MARC’s valuation of Platinum Sentral of RM567.5 million represents a 24.3% discount to the property’s current market value of RM750 million as appraised by an independent valuer.

As at December 31, 2015, Platinum Sentral recorded full occupancy for its office and retail space components comprising 419,643 sq ft and 56,727 sq ft respectively. The office space component accounted for about 90% of the total rental income for the year, with an average rental rate of RM8.68 per sq ft on the secured lease agreements ranging from three to 15 years. Platinum Sentral remains exposed to significant concentration risk given that its top three tenants occupy about 80.5% of the net lettable space. This risk is mitigated through safeguards in the lease agreements which allow Platinum Sentral to claim rental charges for the remaining lease periods in the event of termination. In addition, MARC draws comfort from the strong track record of the REIT manager, MRCB Quill Management Sdn Bhd (formerly known as Quill Capita Management Sdn Bhd), in managing the property.

MARC views the three major tenants as creditworthy entities given the status of two as government-linked companies and the third as a subsidiary of a multinational oil and gas corporation. For 2015, Platinum Sentral generated an annualised net operating income (NOI) of RM46.0 million, above the stabilised NOI of RM43.7 million. This was also sufficient to meet the debt service cover ratio (DSCR) requirement of 1.50 times under the Senior CP/MTN Programme. Despite the better-than-expected NOI performance, the rating agency has maintained the stabilised NOI assumption, taking into consideration the office space oversupply conditions in the Klang Valley.

MARC notes that the existing Senior CP holders have provided underwriting commitments to address the short-term maturity rollover risk. The refinancing risk in 2020 is mitigated by the two-year period between expected and legal maturities of the Senior CP/MTN Programme which should allow sufficient time for disposal of the collateral property by the security trustee in the event Murud Capital is not able to redeem or refinance the outstanding CP/MTN on the expected maturity date.

The stable outlook reflects MARC’s expectations that the collateral property will continue to demonstrate resilient occupancy and rental performance that is supportive of the ratings.

Major Rating Factors

Strengths

• Strong 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 in line with increasing supply of office space; and
• Refinancing of commercial papers/medium-term notes at expected maturity.