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MARC has assigned the ratings of MARC-1(fg)/AAA(fg) to MRCB Sentral Properties Sdn Bhd’s (MRCB Sentral) RM400 million Commercial Papers/Medium Term Notes (CP/MTN) Programme. The ratings carry a stable outlook. The assigned ratings and outlook are underpinned by an unconditional and irrevocable financial guarantee insurance policy provided by Danajamin Nasional Berhad (Danajamin) in relation to the CP/MTN Programme. MARC currently rates Danajamin’s financial strength as AAA/stable on the basis of its important role as Malaysia’s first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base, ample liquidity and conservative investment policy.
MRCB Sentral is a wholly-owned subsidiary of Malaysian Resources Corporation Berhad (MRCB) whose principal activities include property development and investment, construction, engineering and environmental rehabilitation operations. MRCB Sentral currently owns a shopping mall and manages a 20-storey office block; both properties are located in Shah Alam. MRCB’s largest shareholder is the national social security provider, Employees Provident Fund, with an equity interest of 41.9% as at June 30, 2010.
The proceeds from the issuance of notes under the programme will part finance the construction costs for a mixed commercial development project known as KL Sentral Park at Kuala Lumpur Sentral (KL Sentral). The programme is structured to be non-amortising with principal repayment occurring only at the end of the programme’s seven-year tenure to reflect the two likely repayment sources for the rated debt – refinancing proceeds or proceeds from the disposal of KL Sentral Park. During the tenure of the programme, MRCB Sentral’s debt service obligations under the programme are limited to the coupon payments on the MTNs which will be funded from MRCB Sentral’s rental collections from KL Sentral Park.
KL Sentral Park is located within the 72-acre KL Sentral commercial hub which comprises Stesen Sentral, corporate office towers, 5-star international hotels, luxury condominiums and a shopping mall. The entire KL Sentral project, which has a gross development value of RM14 billion, is expected to be fully completed by 2016.
KL Sentral Park will consist of five blocks of offices known as Blocks A, B, C, D and E, with minimum height of three storeys and maximum height of five storeys, erected on top of a 2-storey car park with 680 parking bays and net lettable area of offices and retail spaces of approximately 437,083 sq ft and 72,290 sq ft respectively. Construction works on the site commenced in the third quarter of last year and are expected to be completed by the third quarter of next year, with the main contractor being a wholly-owned subsidiary of MRCB. Total pre-development and construction costs are approximately RM384.8 million. In assessing the construction risk on KL Sentral Park’s rental revenue stream, the rating agency considers the overall track record of MRCB group in commercial development projects as a positive factor. MARC believes that the MRCB group’s experience with managing completed commercial developments at KL Sentral and KL Sentral Park’s prime location should enable the new office blocks to achieve and maintain satisfactory occupancy.
To date, MRCB Sentral has entered into a 15-year lease agreement with government agency Small and Medium Industries Development Corporation for the rental of Blocks B and C. MRCB Sentral also received a commitment to lease from SBM Malaysia Sdn Bhd, a multinational oil and gas company, for lease of Block E for a period of six (6) years. These commitments provide assurance of a minimum 54% occupancy of the office space in KL Sentral Park. The corresponding rental stream is sufficient to address the coupon payments on the MTNs. The tenancy agreements allow for upward rental adjustments every three years, thereby providing an element of inflation protection.
Noteholders are insulated from downside risks in relation to MRCB Sentral’s credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will be primarily driven by changes in Danajamin’s credit strength. Major Rating Factors Strengths Guaranteed by Danajamin in respect of coupon/interest and principal payment obligations; Prime location of the commercial property financed; Demand for office space benefits from MSC Cybercentre status; and Assured take-up of 54% of total net lettable area (NLA) addresses annual debt service.
Challenges/Risks Cash inflows dependent on timely achievement of project milestones; Highly competitive office space market; and Refinancing risk posed by bullet repayment structure of the debt programme.
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