MARC has assigned a rating of AAAIS to Midciti Sukuk Berhad's (MSB) RM880 million Islamic Medium Term Notes Programme (Sukuk Programme). The outlook on the rating is stable.

MSB’s RM880 million Sukuk Programme represents a novation of Midciti Resources Sdn Bhd’s (Midciti Resources) former IMTN programme of the same amount; the outstanding sukuk novated under the rated programme amounts to RM880 million.

KLCC REIT and MSB will enter into an inter-financing agreement under which the sukuk proceeds are onlent to KLCC REIT and the principal payments provided by KLCC REIT on the financing are designed to address the programme's reduction schedule. However, MARC notes that the sukuk maturities do not generally mirror the programme's reduction schedule, which gives rise to an element of roll-over risk. To address roll-over risk, KLCC REIT will procure an annual renewable revolving credit facility (RCF) of RM200 million from a financial institution with a minimum rating of “AA”. MARC has determined that the RCF has been sufficiently sized to provide the funds necessary to cover maturing sukuk. The RCF may be substituted with an alternative financial arrangement only on condition that the rating on the programme will not be lowered as a result of such substitution.

MARC's rating of the Sukuk Programme is in line with its pre-novation rating notwithstanding that post-novation, Petroliam Nasional Berhad’s (PETRONAS) corporate structure linkage in our view has decreased due to the introduction of REIT/SPV financing entity (i.e. MSB) as compared to Midciti Resources and PETRONAS’ previous typical company (parent/subsidiary) linkage. MSB’s proximity to PETRONAS as a special purpose financing vehicle of a listed REIT is lower compared to Midciti Resources and PETRONAS’ parent-subsidiary relationship. In addition, sukukholders are also potentially exposed to market access risk arising from KLCC REIT’s RCF, particularly as a change in KLCC REIT’s credit quality could result in non-renewal of the said facility.

The rating continues to be generally based on the credit quality of PETRONAS in its capacity of head lessee of the PETRONAS Twin Towers. The lease rentals under a 15-year irrevocable triple net head lease agreement (HLA) with built-in step-up rates match the reduction schedule of the rated programme. MARC continues to maintain a public information rating of AAA/Stable on PETRONAS. A four-month build-up of lease rentals in a Revenue Account (RA) opened by KLCC REIT ensures cash flows from the lease are captured to cover KLCC REIT’s obligations under the inter financing agreement with MSB which in turn correspond to the programme's reduction schedule. However, a waiver may be sought in the event KLCC REIT is able to provide documentary evidence that it has secured financing to address the programme’s reduction schedule.

The rating also takes into account the reduction schedule for the programme which ensures that the sukuk is fully amortised over the term of the programme. MARC considers the mitigation of refinancing risk as pertinent to the assigned rating as MSB will not own any property asset. Sukukholders will, however, have a third party legal assignment over the rights and benefits of the head lease agreement and RA.

MARC assesses the likelihood of termination or non-renewal of KLCC REIT's RCF to be low given the stable cash flows characteristic of its managed properties, its manageable debt leverage and good financial flexibility. KLCC REIT will own a portfolio of three properties, Menara 3 PETRONAS, Menara ExxonMobil and PETRONAS Twin Towers, upon completion of KLCCP Group's corporate restructuring. The KLCCP Stapled Group that will be formed as a result of the stapling of KLCCP's shares to REIT units will manage a portfolio of properties with a pro-forma valuation of RM15.4 billion, including a 75% and 60% stake in the Mandarin Oriental Hotel, Kuala Lumpur and Suria KLCC shopping complex respectively. MARC expects the KLCCP Stapled Group's investment strategy to be accretive to overall asset quality, and the combined entity's use of debt leverage to remain prudent. The rating agency believes that the abovementioned factors should remain supportive of KLCC REIT's credit quality and market access.

MARC regards the sukuk as lease receivable-backed instruments supported by third-party structured liquidity, and accordingly considers the credit quality of the sukuk to be sensitive to changes in the credit strength of PETRONAS and KLCC REIT, as well as to the likelihood of termination or non-renewal of the liquidity facility taking place prior to the final repayment to sukukholders. 

Contacts:
Nisha Fernandez, +603-2082 2269/ nisha@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.