The LTV ratios are derived based on MARC Ratings’ income capitalisation approach using a stabilised net operating income (NOI). The stabilised NOI is a five-year (2022-2026) average where actual NOI is used for 2022 and 2023, and projected NOI is used for 2024-2026. Under the income capitalisation approach, the value of Menara Shell is estimated at RM586.7 million, 12.8% lower than its market value of RM672.5 million as verified by an independent valuer as of December 31, 2023.

In 2023, the NOI for the collateral building Menara Shell increased to RM48.4 million from RM47.1 million in the previous year mainly due to a pre-agreed step-up in the rental rate for the anchor tenant. The rating agency notes that the NOI could reduce to around RM39.0 million in 2024 from the exit of Menara Shell’s second-largest tenant (accounting for 17.6% of net lettable area (NLA) of 557,458 sq ft) following the expiry of its tenancy in 2Q2024, and assuming no replacement tenant is found during the year. Meanwhile, SRM has commenced marketing efforts to secure replacement tenants. Nonetheless, MARC Ratings views that given the excess office space supply in Kuala Lumpur, maintaining high occupancy levels and rental rates would be challenging. 

Based on the rating agency’s stress scenario, the LTV ratios would be breached if the average NOI declines below RM30.5 million with an occupancy rate of 70% and average rental rate of RM6.46 psf (2023: 98%; RM8.30 psf). Given that the projected occupancy rate of Menara Shell as at end-2024 will be around 80%, this reflects a modest buffer assuming that no additional issuances are made under the programme. The anchor tenant, Shell Malaysia Trading Sdn Bhd (Shell), a wholly-owned subsidiary of Shell plc, occupying a substantial 54.7% of total NLA through end-2028, provides a large degree of occupancy stability over the long term. In case of early termination, there are also provisions for rental claims over the remaining unexpired term of the leases.

The exposure of the CP to rollover risk is mitigated by the availability of investor commitment to subscribe to the CP throughout its expected tenure. Meanwhile, the refinancing risk of the MTNs is buffered by the two-year tail period between the expected and legal maturity dates. 

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

The ratings may come under pressure if tenancies are terminated/not renewed in a timely manner, or if tenancies are renewed at rental rates that are not supportive of the stabilised NOI to be able to maintain the LTV ratios within their respective thresholds.