Inverfin Sdn Bhd - 2010

 MARC has affirmed its MARC-1/AAA and MARC-1/AA ratings of Inverfin Sdn Bhd’s (Inverfin) RM160.0 million Class A Notes and RM40.0 million Class B Notes respectively under a RM200.0 million commercial papers/medium term notes (CP/MTN) programme. The ratings are supported by the quality and strategic location of the collateral property, low loan-to-value ratios (LTV) for the respective notes, consistently high occupancy levels and structural features incorporated into the transaction. The ratings carry a stable outlook.

Inverfin is a special purpose entity incorporated for the sole purpose of owning and managing the operations of a single commercial property asset, Menara Citibank, which serves as the collateral property for the rated notes. Menara Citibank is a 50-storey office building with a net lettable area of 733,634 square feet (sq ft) located on Jalan Ampang within Kuala Lumpur’s commercial hub, the Golden Triangle. The terms of the rated notes require Inverfin to adhere to operational restrictions, restrictions on changes in its shareholding as well as dividend distributions during the tenure of the transaction. Inverfin’s present shareholders are Menara Citi Holding Company Sdn Bhd, a wholly-owned subsidiary of Citibank Overseas Investment Corporation (COIC), and Hap Seng Realty (KL City) Sdn Bhd, which is ultimately held by Hap Seng Consolidated Berhad. The former owns 50% of shareholdings in Inverfin, while the latter owns approximately 50%.
 
The notes are structured on an interest-only basis with no amortisation of principal prior to the 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 an expected and legal maturity of 5.5 years and 7 years respectively from the issue date of August 2007, and MARC opines that the 1.5-year 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 an assignment over insurance policies for the collateral property. 

As at June 30, 2010, Menara Citibank’s total occupancy rate registered at a lower level of 81.73% compared to 92.69% in MARC’s 2009 review due to expiry of lease agreements with its third largest tenant and other various other smaller tenants since. Despite the decline in occupancy rates, Inverfin’s operations continue to benefit largely from its financially strong anchor tenant, Citibank Berhad, which presently  accounts  for  44.4%  of  total  building  occupancy  and  has extended its lease term to 2013.

Citibank Berhad has been a tenant of Menara Citibank since 2000 and is one of the largest incorporated foreign banks in Malaysia focused on consumer and corporate banking. The bank possesses a resilient earnings base and defensible market position, along with a track record of consistent profitability. Aside from its anchor tenant, Inverfin also has other long-standing tenants that have occupied the collateral property for more than five years, including Talisman Malaysia Ltd, which accounts for 15.6% of total occupancy. To date, Inverfin has maintained a relatively stable and satisfactory tenancy base in terms of quality and diversity.

Additionally, Inverfin has managed to sustain a level of financial performance necessary to maintaining the ratings of the notes, as a result of stronger revenue contribution from existing tenants at higher rental rates and the addition of new tenants. For its financial year ended December 31, 2009 (FY2009), Inverfin’s revenue rose 6.2% to RM51.8 million (FY2008: RM48.8 million) and registered a net operating income (NOI) of RM39.1 million, higher than the stabilised NOI of RM29.9 million assumed for the RM398.7 million discounted cash flow valuation of the collateral property company prior to the issuance of its rated notes. At the same time, the ratings are further supported by the collateral property’s LTV of 34.93% vis-à-vis MARC’s applied LTV thresholds of 40.1% and 50.2% for the AAA-rated Class A Notes and AA-rated Class B Notes respectively. The present LTV ratio is based on outstanding Class A notes of RM160.0 million and the property’s book value of RM458.0 million.

Finally, the stable outlook for the ratings reflects MARC’s expectations that the collateral property will continue to show stable performance based on its currently sufficient level of occupancy and the average length of its existing leases, 54.84% of which have terms up to 2013. In addition, we expect that the collateral property will carry a market valuation, upon maturity of the notes, that is significantly higher than its currently appraised value which was assessed in 2007. 

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