MARC AFFIRMS ITS RATINGS ON ALL CLASSES OF INVERFIN SDN BHD’S RM200 MILLION CP/MTN PROGRAMME

MARC affirms its MARC-1/AAA rating of Inverfin Sdn Bhd’s (Inverfin) RM160.0 million Class A Notes issued under its RM200.0 million commercial papers/medium term notes (CP/MTN) programme. The programme allows for the issuance of junior Class B notes which would carry a rating of MARC-1/AA; however, Inverfin currently has no outstanding Class B notes issued under this programme. The ratings continue to be supported by the collateral property’s stable performance, which has given rise to satisfactory loan-to-value (LTV) and debt service coverage ratios in line with the ratings. At the same time, MARC acknowledges the notes’ approaching expected maturity date and would expect Inverfin to arrange for timely refinancing of the notes, as incorporated in the stable outlook.

                                                

Inverfin is a special purpose entity incorporated for the sole purpose of owning and managing the operations of a single commercial property asset, Menara Citibank, which serves as the collateral property for the rated notes. Menara Citibank is a 50-storey office building with a net lettable area of 733,072 square feet (sq ft) located on Jalan Ampang within Kuala Lumpur’s commercial hub, the Golden Triangle. Inverfin is 50%-owned by Menara Citi Holding Company Sdn Bhd, a wholly-owned subsidiary of Citibank Overseas Investment Corporation, and 50%-owned by Hap Seng Realty (KL City) Sdn Bhd, a wholly-owned subsidiary of Hap Seng Consolidated Berhad.

The notes are structured on an interest-only basis with no amortisation of principal prior to the maturity date. Menara Citibank generates sufficient monthly rental income to fund coupon payments. The principal repayment will be funded by refinancing of the notes or disposal of Menara Citibank. The notes have an expected and legal maturity on February 28, 2013 and August 28, 2014 respectively.

Since MARC’s last review in 2011, Menara Citibank’s occupancy rate has increased to 91% (as of June 30, 2012) from 86% following the addition of a newly secured tenant. The collateral property’s occupancy levels continue to be supported mainly by its anchor tenant, Citibank Berhad, which occupies approximately 55.5% of the building’s occupied area. The increase in building occupancy is expected to arrest Inverfin’s declining revenue trend. The building’s average rental rate is also expected to increase marginally with the new tenant commencing its lease in July 2012. During the same period, average monthly rental rates stayed at competitive levels with comparable buildings in the KLCC area. The adequate collection history of Menara Citibank’s tenancy base supports the quality of its earnings and cash flow.

Inverfin’s revenue registered a modest decline for its financial year ended December 31, 2011 (FY2011), the second consecutive year of decline since FY2010 mainly due to an increase in the building’s vacancy rate during that period. Subsequently, MARC observes that the occupancy rate has been restored. Both its revenue and pre-tax profit were marginally lower at RM47.0 million and RM28.4 million respectively (FY2010: RM47.5 million, RM30.2 million). However, the company showed a stronger net cash flow from operations (CFO) figure of RM30.2 million versus RM28.3 million in FY2010 due to working capital reductions. Generally, CFO interest measures have been stable at 3.94 times and 3.69 times the year before. Meanwhile the company’s leverage metrics as measured by its debt-to-equity ratio of 0.46 times remained largely stable. Compared to FY2010, Inverfin reduced its dividend payout to RM15.9 million in FY2011 from RM22.0 million. Inverfin’s cash and cash equivalents of approximate RM50.7 million as at end-2011 indicate that its cash flow generation would continue to adequately support its operational liquidity; however redemption of the outstanding notes would be dependent on refinancing or asset disposal.  

As at end-FY2011, the LTV ratio on the Class A notes based on MARC’s discounted cash flow valuation of RM496.0 million remained at 32.3%, which falls within the required range for the Class A notes’ ratings. Menara Citibank was recently appraised at RM665 million in early April 2012. This gives rise to an implied LTV ratio of 24.1%. The low LTV ratios coupled with Inverfin’s stable financial profile offer a high level of protection for the notes.

The stable outlook for the ratings reflects MARC’s expectations that the collateral property will continue to perform sufficiently well and that refinancing of the Class A Notes be managed adequately. Deviations from these expectations could result in a negative rating action.

Contacts:

Jason Kok, 03-2082 2258/ jason@marc.com.my;

David Lee, 03-2082 2255/ david@marc.com.my;

August 27, 2012