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 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) with an occupancy level of 93%. Under this approach, the collateral property Menara Shell is valued at RM549 million. 

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.

Menara Shell is a 33-storey purpose-built office with a total net lettable area (NLA) of 557,458 sq ft. The MTN and CP issuances are secured by a third-party first legal charge on the collateral property. We view that its strategic location within the KL Sentral transportation hub and grade A building status remain strong drivers for Menara Shell’s strong operational performance. However, the property remains exposed to sudden changes in the occupancy level as tenant concentration is high among five clients with its anchor tenant occupying about 54.7% of NLA. 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 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. 

Lim Wooi Loon, +603-2717 2943/ wooiloon@marc.com.my; 

Lee Chi Han, +603-2717 2939/ chihan@marc.com.my.