MURUD CAPITAL SDN BHD - 2019

MARC has affirmed its MARC-1 rating but lowered its AA rating to AA- on Murud Capital Sdn Bhd’s Senior Commercial Papers/Medium-Term Notes (Senior CP/MTN) programme of up to RM290 million. The ratings outlook remains negative. 

The rating action assumes a reduction of RM35 million in the outstanding amount of RM279 million of Senior CP/MTN to RM244 million by end-March 2019 through advances from MRCB-Quill REIT (MQ REIT). Murud Capital is wholly owned by MQ REIT, a real estate investment trust with a portfolio of commercial buildings. MQ REIT’s funding vehicles rated by MARC are Murud Capital and Kinabalu Capital Sdn Bhd.  

The lower rating on the MTN reflects the reduced headroom in the loan-to-value band in line with the decline in Murud Capital’s net operating income (NOI) on lower occupancy levels at Platinum Sentral, the collateral property. The negative outlook continues to reflect MARC’s concern on the uncertainty of tenancy renewals of some key tenants which are on very short-term tenancy agreements. At the current outstanding of RM244 million under the CP/MTN Programme, the ratings are likely to be lowered if these tenants vacate and timely replacements are not found. 

Platinum Sentral is a commercial building located within the KL Sentral transportation hub. As at end-2018, Platinum Sentral’s occupancy level declined to 87% from 98% in the previous year, reflecting the ongoing challenges in the rental market for commercial building owners. MARC views the downward pressure on occupancy levels as not likely to abate over the medium term, given the prevailing excess capacity of commercial office space and more coming onstream between 2019 and 2021.  

As at end-2018, Platinum Sentral’s average office rental rate of RM9.11 psf is considered higher than the range of RM6.85 psf to RM7.30 psf for prime office buildings in KL city centre and KL Sentral. In view of this, Platinum Sentral could face downward pressure on rental rates upon renewals. MARC has considered Platinum Sentral’s occupancy level and rental rates in revising its stabilised NOI to RM36.9 million, which gives rise to an assessed capital value of the collateral property of RM479.7 million (2017: RM567.7 million).  

Platinum Sentral also has a high tenant concentration risk as the top three tenants represent about 69.3% of the total net lettable area (NLA) of office space with anchor tenant, Small and Medium Corporation Malaysia (SME Corp), accounting for about 41.6% of the total NLA. Nonetheless, SME Corp has a long-term tenancy expiring in 2026, which provides a stable base line in rental revenue and occupancy rates. Early termination risk is moderated by contractual agreements signed between the tenants and MQ REIT, allowing the latter to claim rental charges over the remaining unexpired term of the leases in the event of premature termination. 

Murud Capital’s debt service cover ratio (DSCR) and security cover ratio (SCR) of 2.55x and 1.86x (2017: 2.99x; 1.86x) have remained within the DSCR and SCR requirements of 1.50x and 1.40x under the programme. 

MARC highlights the refinancing risk in 2020 arising from the non-amortising feature of the Senior CP/MTN. While there is a two-year period between the expected and legal maturities of the rated programme, which provides headroom for disposal of the collateral property by the security trustee, the rating agency understands that Murud Capital has commenced efforts to refinance the property. The CPs are also exposed to rollover risk. 

Major Rating Factors 

Strengths 

• Sufficient security coverage; and 
• Strategic location of collateral property in the Kuala Lumpur commercial hub. 

Challenges/Risks  

• High tenant concentration and renewal risk; and 
• Weakening rental rates in line with increasing supply of office space.