MRCB Sentral Properties Sdn Bhd - 2011

MARC has affirmed the short-term and long-term ratings of MRCB Sentral Properties Sdn Bhd’s (MRCB Sentral) RM400 million Commercial Papers/Medium Term Notes (CP/MTN) Programme at MARC-1(fg)/AAA(fg) with a stable outlook. The rating action affects RM400 million of outstanding notes issued under the programme. The affirmed ratings and outlook are underpinned by an unconditional and irrevocable financial guarantee insurance policy provided by Danajamin Nasional Berhad (Danajamin) for 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 and ample liquidity.

Wholly-owned by Malaysian Resources Corporation Sdn Bhd (MRCB), MRCB Sentral Properties Sdn Bhd’s (MRCB Sentral) principal activities are property development and property investment and management. Its current list of properties includes a shopping mall, an office tower and factory premises, where it receives rental income and property management fees. Its parent, MRCB, a company listed on the main market of Bursa Malaysia, is principally an investment holding company; the company and group are involved in construction, property development, property investment, environmental engineering, infrastructure, and building services. As at September 30, 2011, the largest shareholder of MRCB is the national social security provider, Employees Provident Fund Board (EPF), with an equity stake of 42.25%.

The programme has been fully drawn down and the proceeds have been used to finance the construction and development of KL Sentral Park, a mixed commercial development project located within the 72-acre Kuala Lumpur Sentral (KL Sentral) commercial hub, which comprises Stesen Sentral, corporate office towers, 5-star international hotels, luxury condominiums and shopping mall. The entire KL Sentral development, which has a gross development value of RM14 billion, is expected to be fully completed by 2016. Debt service on the non-amortising notes is supported by rental revenue stream of KL Sentral Park.

KL Sentral Park, a green building, consists of five blocks (Blocks A to E) of contemporary office buildings with gross floor area (GFA) of 982,000 square feet (sq ft), net lettable area (NLA) of 437,081 sq ft and 72,290 sq ft for office and retail respectively, and car park facilities for 680 cars. The construction of KL Sentral  Park,  which  commenced  in  the  third quarter 2009, has  been completed within the  budgeted timeframe, with vacant possession delivered to two anchor tenants, one government agency and a multinational oil and gas company. Blocks B and C have been occupied since September 2011 and Blocks E and D will be occupied by December 2011. Non-completion risks have been eliminated with the completion of the property, and the property’s exposure to vacancy risk has been meaningfully mitigated with a projected occupancy level of 78% by December 2011 for its office space. Only Block A and the retail space in KL Sentral Park remains untenanted; these collectively account for 32.7% of the property’s NLA. MARC notes a fairly high degree of tenant concentration; the three anchor tenants will occupy 78% of NLA of the property’s office space. However, tenant concentration risks are sufficiently mitigated by the property’s favourable location and high quality which lowers re-leasing risk, as well as the six-to-fifteen year tenure of leases. Also, the overall profile of tenants implies low tenant credit risk. The long-term leases are expected to provide cash flow stability to MRCB Sentral and support to its debt servicing ability.

The provision for upward rental adjustments every three years under MRCB Sentral’s lease arrangements provide some measure of protection against inflation. The expected net annual rental income from the secured tenants of RM27.5 million provides a 1.53 times cover of coupon payments and guarantee fees. Fixed charge coverage levels will be strengthened with the take-up of the remaining untenanted Block A and retail space. The programme is exposed to refinancing risk due to its non-amortising structure, where the principal repayment is due at the end of the programme’s seven-year tenure. The two funding options contemplated for the repayment of the notes are refinancing or asset disposal. MARC believes that the high quality of KL Sentral Park should help mitigate debt refinancing risk and/or execution risk associated with the property disposal.

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.

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