CREDIT ANALYSIS REPORT

INVERFIN SDN BHD - 2021

Report ID 6053675 Popularity 130 views 22 downloads 
Report Date Jun 2021 Product  
Company / Issuer Inverfin Sdn Bhd Sector Property
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Rationale
Rating action     
MARC has affirmed its rating of AAA on Inverfin Sdn Bhd’s Tranche A notes under its maximum limit of RM160 million of the Medium-Term Notes (MTN) programme. The rating outlook has been revised to negative from stable.

Rationale     
The affirmed rating reflects the acceptable loan-to-value (LTV) ratio of Tranche A notes within the benchmark that MARC applies for the AAA rating band. The LTV ratio stood at 41.9% compared to the benchmark of 43% for a AAA rating. The LTV ratio was derived from the valuation of the collateral building Menara Citibank under MARC’s income capitalisation approach. Owned by Inverfin, Menara Citibank is valued at RM381.9 million under this approach compared to its market value of RM700.0 million as ascertained by an independent valuer as at December 2, 2020. Over the near term, a forecast net reduction of 3.6% in the building’s occupancy level has been factored in the rating affirmation.

The revised outlook to negative considers the potential decline in Menara Citibank’s occupancy level by about 6% (47,000 sq ft) of net lettable area (NLA) in the event the retail banking operations of Citibank vacate its premises in Menara Citibank following the bank’s plans to exit retail banking business in the region. The impact from the departure on the net operating income (NOI) would affect the LTV ratio such that it would exceed the benchmark for the current rating band. While the exit plan is expected to be carried out on a staggered basis and therefore has no immediate impact on the NOI, Inverfin may find it challenging to address the potential decline in the NOI. This is in light of the subdued rental and occupancy outlook for commercial properties.

Located within the Kuala Lumpur city centre, Menara Citibank has a total NLA of 734,533 sq ft and recorded an occupancy level of 81.2% as at end-2020 (end-2019: 86.0%). The y-o-y decline in occupancy level was mainly due to the departure of a tenant and reduced occupancy by another major tenant. For 2020, Menara Citibank recorded a lower average rental rate of RM5.75 psf (2019: RM6.00 psf). Anchor tenant Citigroup (Citibank Berhad and Citigroup Transaction Services (M) Sdn Bhd) occupies about 52% of the total NLA. Menara Citibank is exposed to tenant concentration risk given that its top five tenants accounted for 70.6% of the total NLA and 83.1% of the total rental income in 2020. The tenant concentration risk from Citigroup is largely mitigated by its longstanding occupancy track record and part ownership of the building.

For 2020, NOI increased 12.8% y-o-y to RM32.6 million. Nonetheless, in our rating case assessment, we have maintained a lower stabilised NOI of RM28.6 million with the LTV ratio remaining within the benchmark. In our sensitivity analysis, assuming the current rental rate is maintained, the breakeven occupancy level is 76%. This indicates that there is limited headroom for occupancy levels to fall from the 81.2% recorded at end-2020. Its cash level stood at RM38.5 million at end-2020. During the year, Inverfin provided rental rebates of about RM0.5 million (1% of total rental income) to retail and food court tenants due to the pandemic. However, no rebates were given to office tenants.

Under the issue structure, Inverfin is to maintain a minimum security coverage ratio (SCR) of 1.43x and finance service coverage ratio (FSCR) of 1.50x post-dividend payment. As at December 31, 2020, the SCR and FSCR remained strong at 4.4x and 6.2x.

Rating outlook     
The negative outlook factors in the lack of headroom to sustain the LTV ratio within the threshold with the eventual exit of Citibank’s retail banking operations. The outlook would be revised back to stable if Inverfin manages to secure tenant replacements for vacancies that are expected to arise and/or other measures are undertaken such that the LTV ratio is within the threshold level to offset the anticipated lower NOI from a decline in the occupancy level.

Rating trajectory

Downside scenario     
The rating will come under pressure if occupancy levels and/or rental rates decline such that the NOI falls below the current stabilised level, thereby potentially impacting the LTV ratio. 

Key strengths
  • Prime location of the collateral property within Kuala Lumpur city centre
  • Satisfactory loan-to-value ratio 
Key risks
  • Pressure on rental rate and occupancy level due to challenging economic conditions
  • High tenant concentration risk



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