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, the rating agency has also affirmed its MARC-1 rating on Kinabalu Capital’s Issue 2 of up to RM170 million Commercial Papers (CP). The ratings outlook is stable.

The ratings affirmation of the Class A MTN, Class B MTN, Class C MTN and CP reflects their loan-to-value (LTV) ratios that are within the LTV benchmarks that MARC applies for the respective rating bands. The Class A MTN, Class B MTN, Class C MTN and CP have LTV ratios of 41.8%, 49.8%, 54.6% and 54.6% against MARC’s benchmark of below 43.0%, 51.0%, 55.0% and 55.0%. The LTV ratios are derived from the rating agency’s assessed capital value of the collateral properties that comprise Quill Buildings 1, 2 and 4 in Cyberjaya, and Tesco Penang.

The collateral properties have a combined total net lettable area (NLA) of 650,940 sq ft. The issuance is secured by a third-party legal charge on the collateral properties, which are tenanted by DHL Asia-Pacific Information Services Sdn Bhd (DHL) (Quill Buildings 1 and 4), HSBC Electronic Data Processing (Malaysia) Sdn Bhd (HSBC EDP) (Quill Building 2) and Tesco Stores (Malaysia) Sdn Bhd (Tesco Malaysia). They occupy about 29.4%, 28.3% and 42.3% of the NLA.

Issue 2 remains exposed to significant concentration risk as the properties are primarily occupied by single tenants. This risk is mitigated by the longstanding occupancy relationship with the tenants and the purpose-built nature of the buildings, designed to meet the requirements of the tenants. MARC notes that DHL’s tenancy is up for renewal in December 2020, for which we understand negotiation has commenced. In 2019, HSBC EDP renewed the rental lease for another three years expiring in 2022, while Tesco Malaysia has a long tenancy that expires in August 2032. MARC also notes the impending sale of UK-based Tesco PLC’s operations in Malaysia to Thai-based CP Group and understands that Tesco Malaysia’s occupancy is not expected to be affected. Nonetheless, there is no early termination provision under the existing tenancy agreement. In the event of early tenancy termination, MRCB-Quill REIT (MQREIT) would have the right to claim rental revenue for the remaining tenancy period. In respect of rentals during the current Movement Control Order, MARC understands that no rental waiver has been given to tenants.   

For 2019, the net operating income (NOI) was higher by 2.2% y-o-y to RM29.2 million. The marginal increase was attributed to the step-up in rental rates for all properties. The debt service cover ratio (DSCR) and security cover ratio (SCR) of 3.61x and 2.33x as at end-December 2019 exceed the minimum of 1.50x under the issue structure. The MTN and/or CP issuances have a combined limit of RM170 million under Issue 2 of Kinabalu Capital’s RM3.0 billion CP and MTN programme. The outstanding under Issue 2 comprised RM130 million Class A MTN and RM40 million CP as at end-February 2020.

The stable outlook reflects the rating agency’s expectation that the operational and financial performances of the collateral properties would be commensurate with the ratings over the next 12 to 18 months.