CREDIT ANALYSIS REPORT

KINABALU CAPITAL SDN BHD ISSUE 3 - 2022

Report ID 605389003783 Popularity 180 views 28 downloads 
Report Date Feb 2022 Product  
Company / Issuer Kinabalu Capital Sdn Bhd Sector Property
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Rationale
Rating action     
MARC Ratings has assigned long-term ratings of AAA, AA and A to Kinabalu Capital Sdn Bhd’s Issue 3 of RM113 million Class A, RM21 million Class B and RM11 million Class C Medium-Term Notes (MTN). The outlook on all ratings is stable.

Rationale     
Kinabalu Capital is a special purpose funding vehicle set up by parent Sentral REIT, a trust that owns a portfolio of commercial properties. Kinabalu Capital is undertaking the third issuance (Issue 3) under its RM3.0 billion MTN programme. Proceeds from Issue 3 of RM130 million will be used to repay the outstanding RM130 million MTN under Issue 2 which matures on March 4, 2022. Upon full repayment, Issue 2 will be cancelled. 

The key collateral properties under Issue 2, namely Quill Buildings 1 and 4 as well as Lotuss Penang will be transferred to Issue 3. The collateral properties under Issue 3 will include Quill Building 3 which replaces Quill Building 2 (presently under Issue 2). The replacement is due to the fact that Quill Building 2 will be vacant in 2022. Quill Building 2 occupies 28.3% (or 184,453 sq ft) of the total net lettable area (NLA) of 650,940 sq ft. With the replacement by Quill Building 3 which has an NLA of 117,198 sq ft, the total NLA of collateral properties under Issue 3 would be lower at 583,685 sq ft. As such, the total issuance limit under Issue 3 is up to RM145 million compared to Issue 2 of up to RM170 million.

The assigned ratings under Issue 3 reflect the loan-to-value (LTV) ratios of the classes that are within the LTV benchmarks for the rating bands.

Outstanding rated issuance (RM million) Actual LTV Rating LTV benchmark
Class A MTN 113 42.8% AAA < 51.0%
Class B MTN 21 50.7%1 AA < 55.0%
Class C MTN 11 54.9%2 A < 55.0%

1 – Outstanding amount of Class A and Class B divided by collateral valuation
      assuming full issuance
2 – Outstanding amount of Class A, Class B and Class C divided by collateral
      valuation assuming full issuance

MARC Ratings used a total stabilised net operating income (NOI) of RM23.6 million based on a five-year average comprising historical NOI for 2021, and projected NOI for 2022-2025 for each property to arrive at the collateral properties’ aggregate value of RM264.3 million under MARC’s income capitalisation approach. This represents a 24.3% discount of the properties’ aggregate market value of RM349.0 million as ascertained by independent valuers as at December 31, 2021. 

Of the collateral properties, Quill Buildings 1, 3 and 4 each is a four-storey purpose-built office located in the flagship zone in Cyberjaya while Lotuss Penang is a three-storey purpose-built hypermarket located in Penang Island. Quill Buildings 1 and 4 are tenanted by DHL Asia-Pacific Information Services Sdn Bhd (DHL). Quill Building 3 is tenanted by BMW Asia Technology Centre Sdn Bhd (BMW Asia Tech), BMW Malaysia Sdn Bhd (BMW Malaysia) and BMW Credit (Malaysia) Sdn Bhd (BMW Credit) (collectively BMW Group) and Huawei Technologies (Malaysia) Sdn Bhd (Huawei Malaysia). Lotuss Penang is tenanted by hypermarket owner Lotuss Stores (Malaysia) Sdn Bhd (Lotuss Malaysia). 

The collateral properties remain exposed to high tenant concentration risk as evident in the occupancy structure. Lotuss Malaysia accounts for 47.1% of total NLA; DHL 32.8%; BMW Group 9.1%; and Huawei Malaysia 4.6%. Quill Buildings 1 and 4 as well as Lotuss Penang are fully occupied, while Quill Building 3 has an occupancy rate of 80% as at end-December 2021. In terms of the tenancy lease agreements, Huawei Malaysia ends in 2024, DHL and BMW in 2025. For Lotuss Malaysia, it has a long tenancy that expires in August 2032. 

We view the concentration and renewal risk to be mitigated by the longstanding tenancy relationships of more than 17 years each, the buildings being purpose-built to cater to the tenants’ requirements and the limited availability of Grade A MSC-status office buildings in the vicinity. MARC Ratings also draws comfort from the expertise of Kinabalu Capital’s parent Sentral REIT and good track record of the REIT Manager, Sentral REIT Management Sdn Bhd (SRM) to mitigate occupancy and renewal risks. 

For 2021, total rental revenue stood at RM28.3 million, recording NOI of RM23.4 million (2020: RM30.5 million; RM24.5 million). The y-o-y decline was due to the departure of a tenant in Quill Building 3. Going forward, step-up rental rates for Lotuss Malaysia and DHL would result in marginally higher total NOI. The rental revenue could also be supported by an increased occupancy level in Quill Building 3, though this has not been accounted for in the NOI projections. 

Under the issue structure, the MTN is required to have a minimum debt service cover ratio (DSCR) of 1.50x at all times as well as security cover ratio (SCR) of 1.50x at all times for Issue 3 after the first issuance of the MTNs and 1.90x at all times for the MTNs under Class A and Class B. The rating case projections show that the rated MTN based on full issuance will achieve a minimum DSCR of 3.80x (without cash). The sensitivity analysis demonstrates that the collateral properties’ rental revenue would need to decrease by a significant 55% before breaching the covenanted DSCR of 1.50x. We note that Kinabalu Capital’s ability to increase its leverage in relation to the rated MTN is capped by the requirement to maintain an SCR of at least 1.50x which provides a buffer against a decline in the collateral properties’ market value. The refinancing risk is mitigated by the two-year tail period between the expected and legal maturity dates. 

Rating outlook     
The stable outlook assumes that the collateral properties will maintain their operational and financial performance in line with the projections that will remain supportive of the LTV ratios for the rating bands.  

Rating trajectory

Downside scenario     
The ratings may come under pressure if tenancies are terminated or not renewed or if tenancies are renewed at rental rates that are not supportive of the NOI to maintain LTV ratios at current thresholds. 

Key strengths
Collateral coverage demonstrated by LTV ratios within rating bands
Creditworthy tenants 

Key risks 
Tenant concentration risk
Oversupply of commercial space limits upside to rental rates






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