MRCB Sentral Properties Sdn Bhd - Aug 2012

MARC has affirmed its short-term and long-term ratings on 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 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.

MRCB Sentral is a wholly-owned subsidiary of Malaysian Resources Corporation Bhd (MRCB), and is mainly involved in property development and investment. The company’s major project is the development of Lot E (now renamed Platinum Sentral) for which proceeds from the fully drawn down CP/MTN programme were utilised. As of May 31, 2012, the construction of Platinum Sentral project has been completed. Comprising five blocks of low-rise office buildings on a 12.2-acre site, the Platinum Sentral has a gross development value (GDV) of RM700 million and a lettable area (LA) of about 450,000 square feet (sq ft) of office space and 78,800 sq ft of retail space at a common atrium shared by the office buildings. As of end-May 2012, the office towers have achieved a strong occupancy rate of 95%, with government-linked companies taking up about 65% of office space. In contrast, demand for the retail space has been weak, with a modest take-up rate of 23% as at end-May 2012 due to competition from nearby retail outlets, and from the Nu Sentral retail mall that is nearing completion.  

MARC is of the view that the strong take-up rate of office space achieved by Platinum Sentral is attributable to the strategic location of the building within the growing hub of KL Sentral that includes integrated transportation system, commercial and residential developments. MRCB Sentral’s full ownership by domestic government-linked property and construction group MRCB continues to be viewed as a positive credit factor. The property business is a core strategic focus for MRCB and MARC accordingly believes that the strategic relationship between the parent and subsidiary would be maintained going forward, which in turn, provides assurance of continued parental support.

Long-term leases, ranging from six to 15 years, provide cash flow stability to MRCB Sentral and support its debt servicing ability. Platinum Sentral’s office lease rates of between RM8.50 psf and RM9.00 psf command a notable premium over the average rental rate of around RM5 psf in KL city area. In addition, the provision for upward rental adjustment every three years as stipulated in the lease arrangements provide some measure of protection against inflation. Based on its current occupancy rate, the net annual rental income (after deducting direct operating cost) from the secured tenants is about RM27.1 million, providing a 1.50 times cover of the coupon payments and guarantee fees. Fixed charge coverage levels will be strengthened further with the take-up of the remaining untenanted Block A and retail area.

Nonetheless, the programme is exposed to refinancing risk due to its non-amortising structure; an upcoming principal payment of RM320.0 million  is due in March 2013 and RM80 million in September 2013. Upon maturity, MRCB Sentral is expected to reissue the notes, extending the maturity to 2017. As for the final repayment of the notes, the company may opt to refinance or undertake the disposal of Platinum Sentral. MARC believes that noteholders exposure to refinancing risk and/or execution risk associated with the property disposal are meaningfully mitigated by the quality of the office buildings and the moderate amount of external financing employed in funding Platinum Sentral’s development.        
 
Overall, 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.

Strengths

• Guaranteed by Danajamin in respect of profit and principal payment obligations;
• Current rental income provides sufficient coverage of fixed charges including debt service; and
• Strategic location within KL Sentral hub.

Challenges/Risks

• Increasing occupancy for Platinum Sentral’s retail element; and
• Refinancing risk posed by bullet repayment structure of the debt programme.