INVERFIN SDN BHD - 2017

MARC has affirmed its ratings on special purpose company Inverfin Sdn Bhd’s (Inverfin) RM200 million Medium-Term Notes (MTN) programme comprising RM185 million Tranche A notes and RM15 million Tranche B notes at AAA and AA respectively. The outlook on the ratings is stable. The current outstanding notes is RM160 million under Tranche A while no notes have been issued under Tranche B.

The notes are secured by a first legal charge over Inverfin’s 50-storey Menara Citibank building (with net lettable area (NLA) of 733,218 sq ft) on Jalan Ampang within the Kuala Lumpur city centre. The ratings reflect the adequacy of collateral coverage on the MTN with a loan-to-value (LTV) ratio at 37.3%, assuming a full drawdown of Tranche A notes and 40.3% for the full drawdown of the Tranche A and Tranche B notes.

During the period under review, Menara Citibank’s occupancy rate declined to 90.5% as at end-2016 from 96.5% in the previous year and is expected to weaken to 79.1 % by end-April 2017 following the non-renewal of tenancy by two tenants. While Inverfin is seeking new tenants for the vacated space, the glut in office space in the Klang Valley may pose challenges to its efforts. This notwithstanding, its anchor tenant, Citibank Berhad (Citibank) which occupies sizeable space remains a source of stability. MARC draws comfort from the fact that the bank’s related company has a 50% interest in Inverfin with the remaining held indirectly by Hap Seng Consolidated Berhad.

Inverfin registered lower net operating income (NOI) of RM36.8 million with an average rental rate of RM6.11 psf in 2016 (2015: RM43.3 million; RM6.00 psf). Notwithstanding the decline, MARC maintained its assumed stabilised NOI at RM37.2 million and a capitalisation rate of 7.5% which provided a valuation of Menara Citibank at RM496.0 million, a 28.1% discount from its fair value of RM690.0 million as appraised by an independent valuer in November 2016. Should the NOI weaken further, MARC will reassess the assumed stabilised NOI used in its calculation. In MARC’s analysis, Inverfin can withstand a decline in its stabilised NOI to RM32.3 million before the notes breach the LTV requirements for the respective rating bands.

For 2016, in addition to the lower occupancy level, fair value loss on investment property of RM3.1 million have also led to a lower operating profit margin of 71.2%. Despite weaker profitability and lower cash flow from operations (CFO) in 2016, the strong coverage and current cash position of RM56.4 million remain sufficient to cover interest payments until maturity in 2019.

Noteholders are exposed to refinancing risk given the bullet repayment on the outstanding notes in February 2019. However, the provision of a one-year period between the expected and legal maturity dates of the issuance allows adequate time for the disposal of the collateral property should Inverfin fail to redeem or refinance the notes, thereby moderating the refinancing risk.

The stable outlook reflects MARC’s expectations that the occupancy rate of the collateral property will remain resilient. The ratings are also supported by Inverfin’s strong financial capacity to withstand moderate occupancy and rental stresses given Menara Citibank’s competitiveness in terms of its prime location and low rental rates. However, MARC may revise the outlook to negative for the Tranche B notes if the collateral property’s performance weakens further over the near term.

Major Rating Factors

Strengths

• High-quality collateral property asset in prime location within city centre; and
• Low loan-to-value ratio and strong cash position.

Challenges/ Risks

• Lower occupancy rates amid softer market conditions;
• Pressure on rental rates given looming oversupply of KL office space; and
• Tenant concentration risk.