In MARC’s last rating update on September 30, 2008, Inverfin Sdn Bhd’s (Inverfin) noteholders had approved the proposed buy-back of the company’s outstanding notes under its RM200.0 million Commercial Papers/Medium-Term Notes (Notes) programme. This was in connection with IOI Corporation Bhd’s (IOI) execution of a conditional sale and purchase agreement to acquire Inverfin for RM586.73 million from its three vendors on August 29, 2008. MARC further informed that upon completion of the proposed buy-back exercise, the ratings on the Notes will be withdrawn. Since the date of our last rating action, IOI has terminated the acquisition and MARC has concluded its review on the performance of the collateral up to end-2008, leading to the affirmation of all outstanding ratings on the Notes.

The affirmed ratings of MARC-1/AAA and MARC-1/AA to Inverfin’s Notes comprising RM160.0 million Class A and RM40.0 million Class B Notes, respectively are supported by the quality and strategic location of the collateral property, reasonably low loan-to-value ratios (LTVs) for the respective notes, consistently high occupancy levels and structural features incorporated into the transaction. The ratings are moderated by the uncertain economic outlook which may impact the renewal of leases, as well as high single tenant concentration and single property risks. In addition, MARC has assigned a stable outlook to the ratings.

Inverfin is required under the structure to limit its principal activities to property investment and office management of its single property, Menara Citibank and to comply with certain covenants as well as restrictions on changes in its shareholding, dividend distributions during the tenure of the transaction. Inverfin’s major shareholders are Menara Citi Holding Company Sdn Bhd with a 50% stake, a wholly-owned subsidiary of Citibank Overseas Investment Corporation (COIC), and CapitaLand Limited which holds a 30% stake.

The Notes are structured on an interest-only basis with no amortization of principal prior to maturity date. Monthly rental income will form the source of payment of coupons and senior expenses under the CP/MTN programme, while the principal repayment will be funded by refinancing of the notes or disposal of Menara Citibank. The Notes have expected and legal maturities of 5.5 years and 7 years respectively and MARC opines that the 1.5 years tail period is sufficient to procure the funds required for principal redemption of the Notes. The Notes are secured by a first legal charge over Menara Citibank and designated accounts; and assignment over insurance policies. 

The collateral property, Menara Citibank, is a 50-storey office building with a net lettable area of 758,608 square feet (sq ft) located on Jalan Ampang in Kuala Lumpur’s Golden Triangle. As at December 12, 2008, the property’s occupancy rate remained stable at 98.9% (2007: 99.0%). Tenant concentration is relatively high with Citibank Berhad (Citibank) occupying 42.7% of total net lettable area. Mitigating the risk of early termination is the requirement for the tenant to provide rental income equivalent to the remaining term of the lease as compensation to Inverfin. As at December 31, 2008, tenancies expiring between 2010 and 2012 represent 82.1% of the total occupied area. MARC expects Inverfin’s revenue to remain stable in the medium-term in view of Citibank’s recent renewal of its lease agreement up to February 2010 resulting in Menara Citibank’s current weighted average rental term of approximately 2.4 years.

Inverfin reported net operating income (NOI) of RM35.3 million for the financial year ended December 31, 2007 (FY2007) and RM35.1 million for FY2008 (unaudited), in line with initial projections. Therefore, MARC has maintained its discounted cash flow valuation of Menara Citibank of RM398.7 million. MARC had applied LTVs of 40.1% and 50.2% to size the ‘AAA’ Class A Notes and ‘AA’ Class B Notes respectively.  Inverfin’s estimated debt service coverage ratios (DSCRs) for FY2007 and FY2008, stood at 2.2x and 7.0x for Class A notes respectively, within the minimum DSCR requirement of 2.2x. Cash flow coverages remained adequate under stress scenarios which include reduction in rental revenue of up to 55% and higher operating expenses.

Contacts:
Azlina Mohamed Noor Beg, 03-2090 2254/ azlina@marc.com.my;
Nadia Edmaz Abdul Hadi, 03-2090 2262/ nadia@marc.com.my