MARC ASSIGNS MARC-1 AND AAA/AA/A RATINGS TO KINABALU CAPITAL’S CP AND CLASS A/B/C MTN ISSUANCES RESPECTIVELY UNDER ISSUE 2 OF UP TO RM170 MILLION; OUTLOOK STABLE

MARC has assigned long-term ratings of AAA, AA and A to Kinabalu Capital Sdn Bhd’s (Kinabalu Capital) medium-term notes (MTN) RM130 million Class A, RM25 million Class B and RM15 million Class C respectively. Concurrently, MARC has assigned a MARC-1 rating to Kinabalu Capital’s issue of up to RM170 million commercial papers (CP). The issuance of the rated MTN and/or CP with a combined issuance limit of RM170 million is under Issue 2 of Kinabalu Capital’s existing RM3.0 billion CP and MTN programmes. The outlook on all ratings is stable. Kinabalu Capital is a wholly-owned special purpose company of MRCB-Quill REIT (MQREIT) and was incorporated to raise financing for MQREIT.

Proceeds from Issue 2 will be used for part repayment of the outstanding RM190 million debt issued under Kinabalu Capital’s existing financing facility. Issue 2 will be secured by a third party first legal charge on a portfolio of commercial properties from which the rental income stream will form the source of interest payments for Issue 2. The portfolio comprises Quill Building 1, 2 and 4 which are freehold four-storey purpose-built offices located in the Flagship Zone in Cyberjaya and Tesco Penang, which is a three-storey purpose-built hypermarket located in Penang Island.

The ratings on Issue 2 reflect the adequate collateral protection as evident from loan-to-value (LTV) ratios that are in accordance with MARC’s LTV requirements for the respective rating bands. The LTV ratios for Issue 2 are based on MARC’s aggregate valuation of RM311.2 million for Quill Building 1, 2, 4 and Tesco Penang, representing a 19.8% discount from the total appraised fair value of collateral properties of RM388.2 million as at December 31, 2016. In line with MARC’s valuation criteria, the discount provides an adequate buffer against any weakening of the properties’ future capital values.

Collectively, Quill Building 1, 2, 4 and Tesco Penang have a net lettable area (NLA) of 650,940 sq ft and have been fully occupied since commencement of commercial operations. These properties are characterised by single-tenant occupancy of subsidiaries of creditworthy multinational corporations, namely Deutsche Post Beteiligungen Holding GmbH (DHL) (Quill Building 1 and 4), HSBC Global Resourcing (UK) Limited (HSBC) (Quill Building 2) and Tesco PLC (Tesco) with lease periods ending in 2019, 2020 and 2032 respectively. The non-renewal risk on DHL and HSBC’s tenancies is mitigated by the longstanding tenancy relationship and the competitive rental rates that are below the average rental rate of RM4.50 per sq ft in the surrounding area. In addition, Cyberjaya’s appeal as an information technology hub and its Multimedia Super Corridor-status are supporting factors for tenancy renewals.

MARC notes the single-tenant occupancy of the properties poses high tenant concentration risk. However, this risk is somewhat alleviated by the heavy exit penalty that allows Kinabalu Capital to claim the rental income for the remaining unexpired tenancy periods. In addition, the building quality maintenance by the REIT manager MRCB Quill Management Sdn Bhd (MRCB Quill Management) through periodic asset enhancement initiatives has also been a factor in maintaining the collateral properties’ appeal to tenants. MRCB Quill Management has a strong track record in managing other property assets of MQREIT as demonstrated by tenancy renewal and occupancy rates of 87% and 98% respectively as at December 31, 2016.

The base case projections show that Kinabalu Capital’s debt service ability is robust with a minimum debt service cover ratio (DSCR) without cash of 3.76 times as Issue 2 is structured on an interest-only basis. MARC’s sensitivity analysis reveals that Issue 2 would be able to withstand moderate-to-high simulation scenarios, including a 40% reduction in rental revenue and departure of one of the three tenants during the tenure. However, in the unlikely event of zero occupancy of Quill Building 1, 2 and 4 for more than 12 months, Kinabalu Capital could potentially breach the DSCR covenant of 1.50 times in 2021.

Issue 2 is subject to refinancing risk given the bullet principal repayment. Kinabalu Capital is expected to fund the bullet repayment by either refinancing or disposing of the collateral properties. MARC believes the two-year tail period between the expected and legal maturity of Issue 2 should provide sufficient time buffer for the execution of the collateral properties’ disposal. Meanwhile, any potential rollover risk in relation to CP of Issue 2 is addressed by the availability of a commitment provided by investors to subscribe to the CP throughout its expected tenure.

The stable outlook reflects MARC’s expectation that the actual LTV ratio on the rated issuance will remain within the LTV requirements and the collateral properties will continue to demonstrate resilient performance that is supportive of the ratings.

Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my; Adib Asilah, +603-2082 2243/ asilah@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

February 24, 2017