Inverfin Sdn Bhd - 2011

MARC has affirmed its MARC-1/AAA rating of Inverfin Sdn Bhd’s (Inverfin) RM160.0 million Class A Notes issued under its RM200.0 million commercial papers/medium term notes (CP/MTN) programme. The programme allows for the issuance of junior Class B notes which would carry a rating of MARC-1/AA. However, Inverfin currently has no outstanding Class B notes issued under this programme. The ratings are supported by the stable performance of the collateral property, low loan-to-value ratios (LTV) for the respective notes and a sufficient tail period beyond the expected maturity of the notes to mitigate refinancing risk in the transaction. The ratings continue to have 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 733,886 square feet (sq ft) located on Jalan Ampang within Kuala Lumpur’s commercial hub, the Golden Triangle. Inverfin is 50%-owned by Menara Citi Holding Company Sdn Bhd, a wholly-owned subsidiary of Citibank Overseas Investment Corporation, and 50%-owned by Hap Seng Realty (KL City) Sdn Bhd, a wholly-owned subsidiary of Hap Seng Consolidated Berhad.

The notes are structured on an interest-only basis with no amortisation 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 an expected and legal maturity of 5.5 years and 7 years respectively, and MARC opines that the 1.5-year tail period is sufficient to procure the funds required for principal redemption of the notes.

In the period under review, Menara Citibank’s total occupancy rate had improved to 85.9% since falling to 81.73% in 2010 as a result of a major tenant vacating the premises. The stability in the occupancy rate has been largely supported by the anchor tenant, Citibank Berhad, which now accounts for more than 50.6% of the building’s net lettable area (NLA). At the same time, total monthly rental has improved with the net increase in occupancy rates, despite a more competitive market for office space and the departure of a few tenants, which have caused average rental rates to dip slightly to approximately RM6.50 psf from RM6.80 psf. Citibank Berhad’s strong credit profile moderates the overall credit risk profile of the building’s tenants.

For its financial year ended December 31, 2010 (FY2010), Inverfin’s revenue contracted 8.2% to RM47.5 million from RM51.8 million in FY2009, following the departure of a major tenant during the year. The company managed to marginally improve its profit before tax margin to 63.5% (FY2009: 63.0%) by reducing administrative costs. Furthermore, the company’s net operating income (NOI) of RM34.9 million remained above the stabilised NOI of RM29.9 million assumed for the initial discounted cash flow valuation of RM398.7 million for the collateral property. The company’s stable performance has also kept its financial profile healthy, reflected by strong cash flow metrics as well as a low gearing ratio of 0.30 times net of cash and cash equivalents of RM59.1 million.

As at end-FY2010, the LTV ratio on the Class A notes based on the lower of the building’s book value of RM458.0 million and MARC’s discounted cash flow valuation was 34.93% and falls within the maximum allowed LTV of 40.1% for a ‘AAA’ rating level. MARC has adjusted its discounted cash flow valuation and stabilised NOI of Menara Citibank to RM496.0 million and RM37.2 million respectively based on revised cash flow projections for the remaining tenure of the notes. All said, the low LTV ratios and Inverfin’s sizeable cash balances denote comfortable protection levels for the notes.

Finally, the stable outlook for the ratings reflects MARC’s expectations that the collateral property will continue to perform sufficiently well, given a strong tenant profile which its management is continuously working to improve as well as visible cash flows for the notes from a substantial percentage of tenants with lease agreements up to the beginning of 2013. Furthermore, MARC expects the collateral property to carry a higher market value at expected maturity of the notes (February 28, 2013) over its current book value; the next valuation is due in 2012. At present, the collateral property’s management has noted that plans for a refinancing of the notes will likely be pursued closer to their maturity date.

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