Posted Date: February 25, 2022
MARC Ratings has assigned long-term ratings of AAA, AA and A to Kinabalu Capital Sdn Bhd’s Issue 3 of RM113 million Class A, RM21 million Class B and RM11 million Class C Medium-Term Notes (MTN). The ratings outlook is stable.
Kinabalu Capital is a special purpose funding vehicle for its parent Sentral REIT and is undertaking the third issuance (Issue 3) under its RM3.0 billion MTN programme. Proceeds of RM130 million from Issue 3 will be used to repay the outstanding RM130 million MTN under Issue 2 which matures on March 4, 2022. The Issue 3 MTN will be secured by a third-party first legal charge on the collateral properties, namely Quill Buildings 1, 3 and 4 as well as Lotuss Penang. The collateral properties have a combined net lettable area (NLA) of 583,685 sq ft.
The assigned ratings reflect the loan-to-value (LTV) ratios of the classes that are within the LTV benchmarks for the rating bands. The collateral properties are valued at an aggregate value of RM246.3 million under MARC Ratings’ income capitalisation approach and the value represents a 24.3% discount of the properties’ aggregate market value of RM349.0 million as ascertained by independent valuers as at December 31, 2021.
Quill Buildings 1 and 4 are tenanted by DHL Asia-Pacific Information Services Sdn Bhd (DHL; 32.8% of total NLA); Quill Building 3 by BMW Group (9.1%) and Huawei Technologies (Malaysia) Sdn Bhd (4.6%); and Lotuss Penang by hypermarket owner Lotuss Stores (Malaysia) Sdn Bhd (47.1%).
Quill Buildings 1 and 4 as well as Lotuss Penang are fully occupied, while Quill Building 3 has an occupancy rate of 80% as at end-December 2021. In terms of the tenancy lease agreements, Huawei Malaysia ends in 2024, DHL and BMW in 2025. For Lotuss Malaysia, it has a long tenancy that expires in August 2032.
The concentration and renewal risks of the collateral properties are mitigated by the longstanding tenancy relationships of more than 17 years each, the buildings being purpose-built to cater to the tenants’ requirements and the limited availability of Grade A MSC-status office buildings in the vicinity. MARC Ratings also draws comfort from the expertise of Kinabalu Capital’s parent Sentral REIT and good track record of the REIT Manager, Sentral REIT Management Sdn Bhd (SRM) to mitigate occupancy and renewal risks.
Under the issue structure, the MTN is required to have a minimum debt service cover ratio (DSCR) of 1.50x at all times as well as a security cover ratio (SCR) of 1.50x at all times for Issue 3 after the first issuance of the MTNs, and 1.90x at all times for the MTNs under Class A and Class B. The rating case projections show that the rated MTN based on full issuance will achieve a minimum DSCR of 3.80x (without cash). The sensitivity analysis demonstrates that the collateral properties’ rental revenue would need to decrease by a significant 55% before breaching the covenanted DSCR of 1.50x.