CREDIT ANALYSIS REPORT

KINABALU CAPITAL SDN BHD - 2019

Report ID 6018 Popularity 72 views 11 downloads 
Report Date Oct 2019 Product  
Company / Issuer Kinabalu Capital Sdn Bhd Sector Property
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Normal: RM500.00        
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Rationale

MARC has affirmed its AAA and MARC-1 ratings on Kinabalu Capital Sdn Bhd’s RM20 million Class A Medium-Term Notes (MTN) and RM200 million Commercial Papers (CP) under Issue 1. The aggregate outstanding nominal value of MTN and CP programmes under Issue 1 is capped at RM220 million. The outlook remains stable.

Kinabalu Capital is wholly owned by MRCB-Quill REIT (MQ REIT), a real estate investment trust (REIT) which owns a portfolio of commercial buildings mainly in the Klang Valley. The MTN and CP under this issuance are secured by a third-party first legal charge on Menara Shell, a 33-storey purpose-built office with a total net lettable area (NLA) of 557,053 sq ft.

The affirmed ratings are premised on the loan-to-value (LTV) ratio of 42.9% for the combined RM220 million issued CP and MTN that remains within MARC’s benchmarks for the relevant rating categories. MARC has assessed the capital value of Menara Shell at RM513.3 million. This also represents a 21.0% discount to the independently appraised value for the property of RM650 million as at December 31, 2018.

Menara Shell’s occupancy level and average rental rate improved to 96% and RM7.75 psf during 1H2019 (end-2018: 93%; RM7.57 psf). The improvement was due to new tenancies from multinational companies taking up office space at competitive rates. These new tenancies account for 6.5% of NLA. Menara Shell’s strategic location within the KL Sentral transportation hub and its A grade building status would ensure fairly resilient capital value and occupancy level.

For 1H2019, Net Operating Income (NOI) was marginally lower at RM18.3 million (1H2018: RM18.5 million) due to a provisioning of doubtful debt from a terminated tenancy. While the NOI recorded in 2018 of RM37.0 million was about 4% lower from MARC’s stabilised NOI of RM38.5 million, the stabilised NOI has not been adjusted on expectations that Menara Shell will improve its performance.

MARC notes that about 5.9% of Menara Shell’s NLA will be up for renewal in 2019. In this regard, the rating agency draws comfort from the REIT manager MRCB Quill Management Sdn Bhd’s (MQM) established track record in property management. Occupancy concern is also partly mitigated by the long-term tenancy agreement with anchor tenant, Shell, a wholly-owned subsidiary of oil major Royal Dutch Shell Plc. Although Shell’s large single occupancy poses tenant concentration risk, the tenancy agreement terms and rental review provisions mitigate this risk. In the event of early termination, the REIT trustee can claim rental revenue from its tenants for the remaining tenancy period.

Under the issue structure, the MTN and CP are required to have a minimum debt service cover ratio (DSCR) and security cover ratio (SCR) of 1.50x throughout the tenure. As at end-June 2019, the DSCR and SCR for Issue 1 stood comfortably above the covenanted levels at 4.38x and 2.95x.

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

The stable outlook reflects MARC’s expectation that the actual LTV ratio on the rated issuance will remain within the LTV requirements and Menara Shell will continue to demonstrate a resilient performance that is supportive of the ratings.

Major Rating Factors

Strengths

  • Strong collateral coverage evident in low loan-to-value ratio;
  • Strategic position of the collateral property in KL Sentral; and
  • Long-term tenancy agreement with anchor tenant Shell People Services Asia Sdn Bhd (Shell).

Challenges/Risks

  • High tenant concentration risk;
  • Pressure on occupancy and/or rental rates due to oversupply of commercial space; and
  • Refinancing risk posed by bullet repayment at expected maturity.
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