MARC AFFIRMS ITS AAA and AA RATINGS ON INVERFIN’S TRANCHE A AND B NOTES RESPECTIVELY

MARC has affirmed its ratings on special purpose company Inverfin Sdn Bhd’s (Inverfin) Tranche A notes and Tranche B notes at AAA and AA respectively with a stable outlook. Inverfin currently has outstanding RM160 million Tranche A notes while Tranche B notes have not been issued as at date.

The notes are secured by a first legal charge over Inverfin’s 50-storey Menara Citibank building located on Jalan Ampang in the Kuala Lumpur city centre. The ratings reflect the strong collateral coverage on the MTN programme under the rating agency’s assessment on the value of the property and Inverfin’s projected cash flows. The property value remains unchanged at RM496.0 million, which brings the loan-to-value (LTV) ratio to 37.3% for the full drawdown of Tranche A notes and 40.3% assuming full drawdown of the Tranche A and Tranche B notes. The low LTV ratio, coupled with a solid financial service coverage ratio (FSCR) of 10.94x (2014: 10.72x) represent the key rating factors.

MARC notes with some concern the increasingly subdued outlook for the office sector in KL given the influx of new office spaces which would limit the rental upside for Menara Citibank. In particular as Menara Citibank’s occupancy level has almost reached its maximum capacity, it would need to rely on rental rate increases to boost its earnings. Menara Citibank’s occupancy rate declined marginally to 96.5% as at end-2015 (end-2014: 99.1%), although this compares favourably with the industry average of 80.0% for office buildings. While anchor tenant Citibank Berhad (Citibank) occupies 45.5% of the total net occupied area of 696,118 sq ft, the concentration risk is mitigated by the bank’s longstanding tenancy track record and its part ownership of the building.

Inverfin registered a net operating income (NOI) of RM43.3 million with an average rental rate of RM6.00 psf in 2015 (2014: RM38.5 million; RM5.65 psf). This is higher than MARC’s assumed stabilised NOI of RM37.2 million. The NOI uptrend over the past four years reflects Inverfin’s growing capacity to service its interest payments and a growing market value of RM692.0 million as at December 31, 2015. Going forward, the rating agency expects the FSCR to weaken slightly due to substantial expenditure on upgrades of the building in 2016. Nonetheless, the strong coverage and current cash position of RM52.0 million is sufficient to cover interest payments until maturity in 2019.

Noteholders are exposed to refinancing risk as the outstanding notes require a bullet repayment in February 2019. However, the provision of a one-year period between the expected and legal maturity dates of the issuance allows adequate time for the disposal of the collateral property should Inverfin fail to redeem or refinance the notes, thereby moderating the refinancing risk.

The stable outlook reflects MARC’s expectations that the collateral property will continue to demonstrate resilient occupancy and rental performance that are supportive of the ratings. However, MARC may revise the outlook to positive for the Tranche B notes if the collateral property’s performance continues to improve over the near term.

Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

March 29, 2016