MURUD CAPITAL SDN BHD - 2018

MARC has affirmed its ratings of MARC-1/AA on Murud Capital Sdn Bhd’s (Murud Capital) Senior Commercial Papers/Medium-Term Notes (Senior CP/MTN) programme of up to RM290 million. The outlook on the ratings is stable. Murud Capital currently has an outstanding RM279 million Senior CP under the Senior CP/MTN programme. The aggregate outstanding nominal value of both the Senior and Junior CP/MTN programmes is capped at RM450 million. There are no outstanding issuances under the unrated Junior CP/MTN programme.

Murud Capital is wholly owned by MRCB-Quill REIT (MQ REIT), a real estate investment trust with a portfolio of commercial buildings. The programme is secured by a first legal charge over Platinum Sentral, a commercial building comprising five blocks of four- to seven-storeys with a net lettable area (NLA) of 476,370 square feet (sq ft). This collateral property is located within the Kuala Lumpur (KL) Sentral transportation hub.

During the period under review, Platinum Sentral’s occupancy rate declined slightly to 98.2% (2016: 99.1%). Correspondingly, the collateral property generated lower net operating income (NOI) of RM45.5 million (2016: RM46.1 million). However, MARC remains concerned on the potential for a larger decline in occupancy level given that about 32.2% of the NLA is due for renewal in 2H2018. In light of excess office space in KL, Platinum Sentral could face challenges in maintaining its historically high occupancy level. In addition, Platinum Sentral commands an average office rental rate of RM9.09 psf that is higher than the average rental rate of about RM6.50 psf for office buildings within the KL city centre. MARC views that upon tenancy renewals, Platinum Sentral’s rental rates are likely to be negotiated lower compared to its current levels.

Against this background, MARC has maintained its stabilised NOI of RM43.7 million. Accordingly, MARC has valued Platinum Sentral at RM567.5 million using a capitalisation rate of 7.7%. The loan-to-value (LTV) ratio for the outstanding Senior CP stood at 49.2% against MARC’s current benchmark of 52.0% for the rating band. Although Murud Capital’s debt service cover ratio (DSCR) and security cover ratio (SCR) have declined to 2.99 times and 1.86 times respectively (2016: 3.04 times; 1.93 times), both have remained within the DSCR and SCR requirements of 1.50 times and 1.40 times respectively under the programme.

MARC notes that tenant concentration risk is high given that three of Platinum Sentral’s major tenants collectively account for 76.7% and 80.7% of total NLA for office space and rental revenue respectively. Nonetheless, early termination risk is mitigated by clauses in the tenancy agreement which allow Platinum Sentral to claim any remaining rental charges in the event of early tenancy termination.

The presence of irrevocable commitments provided by the existing Senior CP holders adequately addresses the short-term maturity rollover risk. In addition, the refinancing risk in 2020 arising from the non-amortising feature of the Senior CP/MTN is addressed by the two-year period between the expected and legal maturiy of the rated programme, providing headroom for disposal of the collateral property by the security trustee in the event Murud Capital is unable to redeem or refinance the outstanding CP/MTN upon its expected maturity. As appraised by an independent valuer, the collateral property’s current market value is RM725 million (2016: RM750 million).

The stable outlook reflects MARC’s expectation that Platinum Sentral will maintain its operational and financial performance that are commensurate with the ratings. Any further deterioration in the collateral property’s performance could lead to a breach in MARC’s rating benchmarks, resulting in negative rating actions.

Major Rating Factors

Strengths

• Strong security coverage;
• Strategic location of collateral property in the Kuala Lumpur commercial hub; and
• Government-linked entities as major tenants provide rental stability.

Challenges/Risks

• High tenant concentration and renewal risk;
• Weakening rental rates in line with increasing supply of office space; and
• Refinancing of commercial papers/medium-term notes in 2020.