INVERFIN SDN BHD - 2019

MARC has affirmed its rating of AAA on Inverfin Sdn Bhd’s outstanding RM160 million Tranche A notes under its RM200 million Medium-Term Notes (MTN) programme. The programme limit of the Tranche A notes has been streamlined to match the outstanding amount of RM160 million from RM185 million. Concurrently, the programme limit of the unrated Tranche B notes has been increased to RM40 million. The outlook on the rating has been revised to negative from stable.

The negative outlook reflects the rating agency’s concerns on the continued pressure on the occupancy rate of the collateral property, Menara Citibank, which could further impact the non-operating income (NOI) generated by the building. Currently, the loan-to-value (LTV) ratio stands at 41.9% against the LTV benchmark of 43% that MARC applies for the AAA rating. The LTV ratio assumes new tenant Citigroup Transaction Services (M) Sdn Bhd (CTSM) will enter into a tenancy agreement with Menara Citibank over the near term. Should there be any further departure of existing tenants without timely replacement or if the new tenancy agreement with CTSM does not materialise within the stipulated period, downgrade rating pressure will increase on the Tranche A notes.

Menara Citibank is Grade A office space and has a net lettable area (NLA) of 731,236 sq ft. Located along Jalan Ampang within the Kuala Lumpur (KL) city centre, Menara Citibank has a market value of RM692.0 million as at December 31, 2018.

In 2018, Menara Citibank’s average rental rate remained relatively stable at RM6.02 psf but its occupancy rate decreased to 73.2% (2017: RM5.99 psf; 79.3%). As a result, NOI declined to RM30.0 million from RM33.4 million. To address the declining occupancy rate, Inverfin is undertaking initiatives such as a refurbishment exercise to attract new tenants. MARC views that there is a high likelihood that the office space overhang in the Klang Valley will persist over the medium term, and therefore it would be challenging to achieve an immediate positive outcome from these initiatives.

Menara Citibank is exposed to high tenant concentration risk given that its top five tenants accounted for 79.6% of its total annual rental income in 2018. Any departure of these tenants would impact its NOI. Menara Citibank also has a higher proportion of tenancy agreements (in terms of total occupied area) with a short notice period of three months instead of six months. This proportion has increased from 9% of the total occupied area in 2017 to 16.1% in 2018. These factors, as well as the assumption that potential tenant CTSM would occupy about 104,000 sq ft in Menara Citibank by 4Q2019, were considered in MARC’s revision of the stabilised NOI for Menara Citibank to RM28.6 million, which raised the value of the property to RM381.9 million.

At this value, the LTV ratio of the maximum limit for Tranche A notes is RM160 million under the MTN Programme, which remains within the LTV benchmark that MARC applies for the AAA rating.

Cash flow from operating activities (CFO) rose 6.4% y-o-y to RM23.4 million in 2018 but CFO interest coverage declined to 3.01x on higher interest payment (2017: 3.27x). Its cash level stood at RM51.8 million (2017: RM48.1 million). Inverfin has declared a lower dividend of RM14.0 million in 2018 (2017: RM26.0 million). Under the issue structure, Inverfin is to maintain minimum security coverage ratio (SCR) of 1.43x and finance service coverage ratio (FSCR) of 1.50x after dividend payment. As at December 31, 2018, the SCR and FSCR remained adequate at 4.32x and 7.30x.

The issuances are structured on an interest-only basis with no amortisation of the principal prior to their respective maturity dates. The bullet principal repayments of the MTN are expected to be funded by proceeds from the refinancing or disposal of Menara Citibank. The refinancing risk is moderated by the one-year tail period between the expected and legal maturity dates.

Major Rating Factors

Strengths

• Collateral property in prime location within city centre;
• Satisfactory loan-to-value ratio;
• Adequate security coverage; and
• Fairly stable rental rates.

Challenges/Risks

• Tenant concentration risk; and
• Oversupply of office space weighing on tenancy terms and occupancy levels.