Inverfin Sdn Bhd - 2015

MARC has affirmed the ratings on special purpose company Inverfin Sdn Bhd’s (Inverfin) RM200 million Medium-Term Notes (MTN) Programme comprising RM185 million of Tranche A notes and RM15 million of Tranche B notes at AAA and AA respectively. The outlook on the ratings is stable. The lower rating on the Tranche B notes reflects its subordination to Tranche A notes in respect of payment priority and security position. Inverfin currently has outstanding RM160 million Tranche A notes while there has been no issuance of Tranche B notes to date.

The notes are secured by a first legal charge over Inverfin’s 50-storey Menara Citibank building located on Jalan Ampang within the Kuala Lumpur city centre. The ratings reflect the adequacy of collateral coverage on the MTN Programme with the loan-to-value (LTV) ratios of Tranche A notes and Tranche B notes assuming full drawdown at 37.3% and 40.3% respectively based on MARC’s valuation of Menara Citibank at RM496.0 million. This represents a 25.4% discount to the fair value of Menara Citibank of RM665.0 million as appraised by an independent valuer. The ratings are also premised on the collateral property’s robust debt service coverages as well as sound occupancy and rental performance.

Menara Citibank’s occupancy rate improved to 99.1% as at December 31, 2014 as existing tenants increased their occupied space (December 31, 2013: 98.2%). MARC notes that the occupancy rate compares favourably with the prevailing industry occupancy rate of 79.1% for office buildings. Citibank Berhad (Citibank) remains the anchor tenant of Menara Citibank, occupying 48.2% of the total net lettable area of 733,649 sq ft. While this poses significant tenant concentration risk, the rating agency takes comfort from Citibank’s longstanding tenancy track record and the bank’s link to the ownership of the building. Menara Citi Holding Company Sdn Bhd, a wholly-owned subsidiary of Citibank Overseas Investment Corporation has a 50% interest in Menara Citibank via Inverfin. The remaining 50% interest is held by Hap Seng Realty (KL City) Sdn Bhd, a wholly-owned subsidiary of Bursa Malaysia-listed entity Hap Seng Consolidated Berhad.

Inverfin registered a net operating income (NOI) of RM38.8 million with an average rental rate of RM5.65 psf in 2014 (2013: RM38.0 million; RM5.11 psf). This is higher than MARC’s assumed stabilised NOI of RM37.2 million. While Inverfin increased its dividend payout to RM17.0 million in 2014 (2013: RM15.0 million), the company’s cash and cash equivalents of RM42.8 million as at December 31, 2014 is sufficient to cover at least five annual interest payments on the outstanding notes. However, redemption of the outstanding notes is dependent on refinancing or disposal of the collateral property. The provision of the one-year period between the expected and legal maturity dates of the issuances provides Inverfin sufficient time for the disposal of Menara Citibank in the event the company fails to redeem or refinance the notes on the expected maturity date.

The stable outlook reflects MARC’s expectation that Inverfin will generate sufficient NOI and maintain an adequate liquidity buffer against any occupancy and rental stresses. Any deviations from these expectations could exert downward pressure on its rating and/or outlook.

Major Rating Factors

Strengths

• Collateral property in prime location within city centre;
• Major shareholder as anchor tenant;
• High quality and stable tenancy base; and
• Low loan-to-value ratio and strong cash flow coverage.

Challenges/Risks

• Refinancing of notes at expected maturity;
• Tenant concentration risk; and
• Pressure on rental rates from increasing competition in the KL office market.