Posted Date: November 10, 2020

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.

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, 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 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.

Lee Chi Han, +603-2717 2939 / chihan@marc.com.my;
Lim Wooi Loon, +603-2717 2943 / wooiloon@marc.com.my.

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