View Credit Analysis Report (6053672)

Date Article2021-06-03 00:00:00
Rating action    
MARC has affirmed its long-term ratings of AAA, AA and A on Kinabalu Capital Sdn Bhd’s Issue 2 Medium-Term Notes (MTN) of RM130 million Class A, RM25 million Class B and RM15 million Class C. Concurrently, the rating agency has also affirmed its rating of MARC-1 on Kinabalu Capital’s Issue 2 of up to RM170 million Commercial Papers (CP). The ratings outlook is stable.

The affirmed ratings reflect the satisfactory LTV ratios of MTN classes within the respective benchmarks for the rating bands. The LTV ratios of Class A MTN, Class B MTN, Class C MTN and CP are 41.8%, 49.8%, 54.6% and 54.6% compared to MARC’s benchmark of 43.0%, 51.0%, 55.0% and 55.0%. The LTV ratios are derived from the aggregate value of the collateral properties namely Quill Buildings 1, 2 and 4 in Cyberjaya, and Lotus’s Penang (formerly known as Tesco Penang) under MARC’s income capitalisation approach. The collateral properties are valued at RM311.2 million under this approach, representing a 21.8% discount of the properties’ aggregate fair value of RM398.0 million as ascertained by independent valuers as at December 31, 2020.

Kinabalu Capital Sdn Bhd is wholly owned by Sentral REIT, a real estate investment trust (REIT) with a portfolio of commercial buildings including the aforementioned collateral properties. The issuance is secured by a third-party legal charge on the collateral properties, which are tenanted by DHL Asia-Pacific Information Services Sdn Bhd (DHL) (Quill Buildings 1 and 4), HSBC Electronic Data Processing (Malaysia) Sdn Bhd (HSBC EDP) (Quill Building 2) in Cyberjaya; and Lotus’s Stores (Malaysia) Sdn Bhd (Lotus’s Malaysia) (Lotus’s Penang). Collectively, the collateral properties have a total net lettable area (NLA) of 650,940 sq ft with DHL accounting for 29.4% of total NLA; HSBC EDP for 28.3%; and Lotus’s Malaysia for 42.3%. The collateral properties are fully occupied.

The properties are exposed to high tenant concentration risk as the buildings are single-tenanted. However, this risk is moderated by the longstanding occupancy relationship with the tenants. In 2020, DHL renewed the rental lease for another five years expiring in 2025, while Lotus’s Malaysia has a long tenancy that expires in August 2032. The disposal of Tesco PLC’s operations in Malaysia and Thailand to CP Group in December 2020 has not affected the occupancy of the collateral building to date. For HSBC EDP, its tenancy is up for renewal in November 2022. Non-renewal risk is low, largely supported by the fact that the buildings are purpose-built to cater to the tenants’ requirements. Early termination risk is mitigated by contractual agreements which allow for claims for rental charges over the remaining unexpired term of the leases in the event of early termination.

For 2020, rental revenue increased marginally to RM31.0 million due to the step-up in rental rate for Quill Building 2. No rental waiver was given to tenants during the movement control order (MCO) period. Net operating income (NOI) stood at RM29.1 million (2019: RM29.2 million). The debt service cover ratio (DSCR) and security cover ratio (SCR) stood at 3.66x and 2.34x as at end-2020, above the minimum of 1.50x under the issue structure. The MTN and/or CP issuances have a combined limit of RM170 million under Issue 2 of Kinabalu Capital’s RM3.0 billion CP and MTN programme. The outstanding under Issue 2 comprised RM130 million Class A MTN and RM40 million CP as at end-March 2021. Kinabalu Capital has the flexibility to reduce the MTN limits.

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 various rating bands.

Rating trajectory 

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

Key strengths
Satisfactory loan-to-value ratios
Creditworthy tenants with longstanding occupancy relationship

Key risks 
Single tenant concentration risk
Renewal risk of key tenant

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