KINABALU CAPITAL SDN BHD - ISSUE 2 - 2019

MARC has affirmed its long-term ratings of AAA, AA and A on Kinabalu Capital Sdn Bhd’s Issue 2 Medium-Term Notes (MTN) of RM130 million Class A, RM25 million Class B and RM15 million Class C. Concurrently, MARC also affirmed its MARC-1 rating on Kinabalu Capital’s issue of up to RM170 million Commercial Papers (CP). The outlook on all ratings is stable.

The issuance of the rated MTN and/or CP with a combined issuance limit of RM170 million is under Kinabalu Capital’s RM3.0 billion CP and MTN programmes. As of end-March 2019, the amount outstanding under Issue 2 stood at RM170 million, comprising RM130 million Class A MTN and RM40 million CP.

The affirmed ratings reflect the adequate collateral coverage provided by the collateral properties based on MARC’s assessed capital value of RM311.2 million. The MTN/CP under Issue 2 are secured by a third-party legal charge on the collateral properties comprising Quill Buildings (QB) 1, 2 and 4 as well as Tesco Penang with a total net lettable area (NLA) of 650,940 sq ft. The collateral properties have been leased by multinational corporations DHL Asia-Pacific Information Services Sdn Bhd (DHL) (QB 1 and 4) since 2002, HSBC Electronic Data Processing (Malaysia) Sdn Bhd (HSBC) (QB 2) since 2003 and Tesco Stores (Malaysia) Sdn Bhd (Tesco Malaysia) since 2004. The Quill buildings are in Cyberjaya while the Tesco building is in Penang.

The long tenancy period notwithstanding, Issue 2 remains exposed to significant tenant concentration risk as all the collateral properties are single-tenanted. This risk is mitigated by the purpose-built nature of the buildings and the low rental rates currently being paid on the properties. In the case of Tesco Malaysia, it occupies a three-storey purpose-built hypermarket located in the populous east coast of Penang island. Tesco’s tenancy expires in August 2032, whereas both HSBC and DHL’s tenancies are up for renewal in November 2019 and December 2020.

MARC notes with some concern the renewal risk for the Quill buildings, given that the massive supply of commercial and office space in the Klang Valley has impacted overall occupancy levels and rental rates. Additionally, HSBC has a new building in Tun Razak Exchange (TRX) which is expected to be ready for occupation by end-2019. In this regard, the relatively high estimated rental rate of newer buildings in the pipeline including those in TRX could act as a deterrent for HSBC to relocate. MRCB Quill Management Sdn Bhd (MQM), the manager for the properties, has commenced early negotiations with HSBC on tenancy renewal. On balance, MARC views non-renewal risk to be low.

For the period under review, Issue 2’s rental revenue has improved due to the step-up in rental rates for QB 1 and 4. The net operating income remained stable at RM28.5 million on the back of higher maintenance costs and utility fees. MARC has assessed the combined value of the collateral properties at RM311.2 million, which represents a 21.2% discount from the total fair value of RM395 million as appraised by an independent valuer as at December 31, 2018.

The MTN and CP are required to have a minimum debt service cover ratio (DSCR) and security cover ratio (SCR) of 1.50x under the issue structure. As at end-December 2018, the DSCR and SCR stood at 3.51x and 2.32x. Issue 2 is subject to refinancing risk given the bullet principal repayment, which is expected to be funded by either refinancing or disposal of the collateral properties. The refinancing risk is mitigated by a two-year tail period between the expected and legal maturity dates. However, being a short-term instrument, the CP are exposed to constant roll-over risk to some extent.  [CKY1] 

The stable outlook reflects MARC’s expectation that the actual loan-to-value (LTV) ratio on the rated issuance will remain within the LTV requirements and the collateral properties will continue to demonstrate sound performance supportive of the ratings. However, downward pressure on the ratings would occur if QB 2’s tenancy is not renewed by end-2019, or if the tenancy is renewed at a lower rental rate.

Major Rating Factors

Strengths

• Low loan-to-value ratio; and
• Creditworthy tenants with long-standing tenancy relationship.

Challenges/Risks 

• Exposure to single tenant risk for each property;
• Downward pressure on office rental rates and terms; and
• Refinancing risk posed by bullet repayment at expected maturity.