View Credit Analysis Report (605312)

Date Article2020-11-17 00:00:00
MARC has affirmed its AAA and MARC-1 ratings on Kinabalu Capital Sdn Bhd’s RM20 million Class A Medium-Term Notes (MTN) and RM200 million Commercial Papers (CP) under Issue 1. The aggregate outstanding nominal value of MTN and CP programmes under Issue 1 is capped at RM220 million. The ratings outlook is stable. As at end-September 2020, the amount outstanding under Issue 1 stood at RM220 million, comprising RM20 million Class A MTN and RM200 million CP. 

The MTN and CP are secured by a third-party first legal charge on the collateral property, Menara Shell, a 33-storey purpose-built office with a total net lettable area (NLA) of 557,053 sq ft. The combined CP and MTN has a loan-to-value (LTV) ratio of 42.9% which is within MARC’s benchmark of below 43.0% for the rating band. The LTV ratio is based on the rating agency’s assessed capital value of Menara Shell at RM513.3 million which is derived by using the stabilised net operating income (NOI) approach.

Menara Shell’s occupancy level and average rental rate improved to 99% and RM8.05 psf during 1H2020 (end-2019: 95%; RM8.04 psf). The improvement was due to an existing tenant increasing its current office space by an additional 5.3% of NLA. MARC views Menara Shell’s strategic location within the KL Sentral transportation hub and its grade A building status to be key factors for the building’s strong occupancy level. Nonetheless, the rating agency notes that Menara Shell remains highly vulnerable to a sudden shift in occupancy level as it is highly concentrated among a few clients. Its anchor tenant Shell People Services Asia Sdn Bhd (Shell), wholly owned by Royal Dutch Shell Plc, occupies 304,673 sq ft (54.7% of NLA). The concentration risk is mitigated by long-term tenancy agreements and the terms therein that provide a recourse to recover lost rentals on early termination.

MARC also draws comfort from the expertise of Kinabalu Capital’s parent MRCB-Quill REIT (MQ REIT), a real estate investment trust (REIT) which owns a portfolio of commercial buildings mainly in the Klang Valley. The REIT manager’s good track record in managing tenant retention is expected to mitigate occupancy and renewal risks. For 1H2020, NOI was 14.8% higher at RM21.0 million, in line with the improvement in average rental and occupancy rates. While Menara Shell improved its performance in 2020, the stabilised NOI was not adjusted to consider the improvement given the prevailing challenging outlook for the office sector.

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 2020, the DSCR and SCR for Issue 1 stood comfortably above the covenanted levels at 5.04x and 2.96x. 

The issuances are structured on an interest-only basis with no amortisation of principal prior to their respective maturity dates. The bullet principal repayments of the CP and MTN are expected to be funded by proceeds from refinancing or the disposal of Menara Shell. The refinancing risk is mitigated by the two-year tail period between the expected and legal maturity dates. 

The stable outlook reflects MARC’s expectation that the LTV ratio on the rated issuance will remain within the LTV requirements, supported by Menara Shell’s strong occupancy level.

Major Rating Factors

  • Strong collateral coverage; 
  • Good location of collateral property, Menara Shell in KL Sentral; and
  • Long-term tenancy agreement with anchor tenant Shell People Services Asia Sdn Bhd. 
  • High tenant concentration risk;
  • Pressure on occupancy and/or rental rates due to oversupply of commercial space; and
  • Refinancing risk posed by bullet repayment at expected maturity.

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