Report ID 60538900394 Popularity 90 views 9 downloads 
Report Date Nov 2021 Product  
Company / Issuer Kinabalu Capital Sdn Bhd Sector Property
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Rating action     
MARC has affirmed its AAA and MARC-1 ratings with a stable outlook on Kinabalu Capital Sdn Bhd’s outstanding RM20 million Class A Medium-Term Notes (MTN) and RM200 million Commercial Papers (CP) under Issue 1. 

The outstanding issuances will mature on December 22, 2021 and are in the process of being refinanced.

The affirmed ratings reflect the loan-to-value (LTV) ratios of the classes that are within the LTV benchmarks for the rating bands. The combined outstanding CP and MTN has an LTV ratio of 40.0%, derived from the stabilised net operating income (NOI) of RM41.2 million based on the four-year average NOI (2020-2023). Under this approach, the collateral property Menara Shell is valued at RM549 million, representing a 16.4% discount on its market value of RM657 million as ascertained by an independent valuer as at December 31, 2020.

In 2020, Menara Shell’s rental income benefitted from the step-up in rental rate for its anchor tenant and higher occupancy level after a major tenant took up additional space. These factors led to a y-o-y improvement in the property’s rental revenue and NOI to RM56.4 million and RM42.9 million. However, for 1H2021, average occupancy rate declined to 96% from 99% following a reduction of occupancy level during the period. Over the next three years, we have assumed a lower NOI based on expected occupancy level of 93%.

Menara Shell is a 33-storey purpose-built office with a total net lettable area (NLA) of 557,458 sq ft. As at 1H2021, the building’s average rental rate increased by 1% to RM8.15 psf (2020: RM8.08 psf). The MTN and CP issuances are secured by a third-party first legal charge on the collateral property. 

In regard to Menara Shell’s operational performance track record, we view that its strategic location within the KL Sentral transportation hub and grade A building status remain strong drivers. However, the property remains exposed to a sudden change in occupancy level as tenant concentration is high with five clients accounting for 90.8% of NLA and 91.7% of total rental income. Its anchor tenant occupies 304,673 sq ft (54.7% of NLA). Nonetheless, the concentration risk is mitigated by long-term tenancy agreements as early termination allows for claims of rental over the remaining unexpired term of the leases. MARC also draws comfort from the expertise of Kinabalu Capital’s parent Sentral REIT and its good track record in managing tenant retention which is expected to mitigate occupancy and renewal risks.

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 2021, the DSCR and SCR for Issue 1 stood comfortably above the covenanted levels at 7.31x and 2.99x. The issuances are structured on an interest-only basis with no amortisation of principal prior to their maturity dates. The bullet principal repayments of the CP and MTN are expected to be funded by proceeds from the refinancing of Menara Shell by December 22, 2021. 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 property will maintain its 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 the issuer does not adjust its outstanding issuances to maintain LTV ratio thresholds in the event of termination/non-renewal of tenancies or if tenancies are renewed at rental rates that are not supportive of the stabilised NOI from which the LTV is derived. 

Key strengths
  • Strategic location of collateral property Menara Shell in KL Sentral transportation hub
  • Long-term tenancy agreements 
Key risks 
  • High tenant concentration 
  • Occupancy and rental rates could be weighed down by oversupply of office space in Klang Valley