INVERFIN SDN BHD - 2018

MARC has affirmed its ratings on Inverfin Sdn Bhd’s (Inverfin) RM185 million Tranche A notes and RM15 million Tranche B notes at AAA and AA respectively under its RM200 million Medium-Term Notes (MTN) programme. Inverfin intends to issue RM160 million Tranche A notes proceeds of which will be used to redeem the outstanding Tranche A notes maturing on February 28, 2018. Concurrently, MARC has assigned AAA rating to this new issuance under Tranche A. Upon completion of the refinancing, MARC will withdraw the ratings on the existing Tranche A Notes and the unissued Tranche B Notes. The outlook on the ratings is stable.

Inverfin is the owner of the 50-storey Menara Citibank on Jalan Ampang in the Kuala Lumpur (KL) city centre. The notes are secured by a first legal charge on the building which has a net lettable area (NLA) of 732,430 sq ft. The ratings affirmation reflects the MTN Tranches’ loan-to-value (LTV) ratios that are in line with the rating agency’s LTV benchmarks for AAA and AA ratings despite the sharp decline in occupancy level at Menara Citibank in recent years.

At end-2017, Menara Citibank’s occupancy level had fallen to 79.3% from 90.5% at end-2016 while the average rental rate declined to RM5.99 psf from RM6.11 psf, resulting in a sharp decline in net operating income (NOI) to RM33.4 million (2016: RM36.8 million). Given that the soft rental market conditions for office space in KL are likely to persist over the foreseeable future, actual NOI for 2017 is used as the revised stabilised NOI. Applying a long-term capitalisation rate of 7.5% to the actual NOI has yielded a MARC-determined value of the building of RM445 million. At this value, the maximum tranche limits for Tranche A of RM185 million and Tranche B of RM15 million under the programme remain within the LTV benchmarks that MARC applies for the AAA and AA rating levels of 43% and 51% respectively. However, any deterioration in the performance of the collateral property below MARC’s benchmarks would result in negative rating actions.

MARC has also considered Inverfin’s strong financial capacity, stemming from the high likelihood and sustainability of the excess cash flow generated after servicing interest on its notes that may be applied to reduce the outstanding debt. Under the rating agency’s stressed scenarios, the company would be able to withstand up to a 24% decrease in its overall rental income before breaking even. Inverfin’s anchor tenant Citibank Berhad (Citibank) currently occupies 39.9% of NLA and generates 46.7% of total rental income, providing a source of rental income stability. Menara Citi Holding Company Sdn Bhd (MCHC) has a 50% interest in Inverfin, with the remaining held indirectly by Hap Seng Consolidated Berhad.

In 2017, cash flow from operating activities (CFO) declined by 27.2% to RM22.0 million, leading to lower CFO interest coverage of 3.26 times. Cash reserves, however, remain strong at RM48.1 million despite a decline (2016: RM56.4 million). While dividend payment increased to RM26 million in 2017 (2016: RM20.0 million), bondholders are protected from leakage through a finance service cover ratio (FSCR) post-distribution covenant of 1.50 times.

The stable outlook reflects MARC’s expectations that Menara Citibank will maintain its operational and financial performance that are commensurate with the ratings. However, negative rating actions may occur if the collateral property’s performance weakens to an extent that the LTV ratios are no longer aligned with MARC’s rating benchmarks for the tranches.

Major Rating Factors

Strengths

• Collateral property asset in prime location within city centre; and
• Satisfactory loan-to-value ratio and strong cash position.

Challenges/Risks

• Lower occupancy rates amid soft market conditions;
• Tenant concentration and renewal risks.