The reaffirmation of the ratings reflects the credit strength of PETRONAS, the principal tenant of the PETRONAS Twin Towers (Tower 1 and Tower 2), which bears the rental payments for both towers. The rental stream forms the primary source of repayment of the debt securities. PETRONAS’ superior credit strength is drawn from its strong financial position, favourable production profile, significant role in the Malaysian economy and full ownership by the Government of Malaysia.

Midciti Resources is the owner of the PETRONAS Twin Towers, which comprises two 88-storey towers costing RM2.81 billion. PETRONAS is the major shareholder with an effective 97.8% shareholding in the company.

Under a 15-year irrevocable Head Lease Agreement (Agreement) on a triple net basis between PETRONAS and Midciti, PETRONAS as the lessee for both towers directly bears the fit out, operating and maintenance costs. The arrangement eliminates the risks of vacancy and rent defaults in respect of the towers. A step-up rental provision has also been included in the Agreement, ensuring increasing rental stream over the life of the lease. The company is, therefore, not subject to the risk of rental decline due to market forces.

The risk of adverse movements in the cost of funds under the commercial paper (CP) programme is mitigated by the availability of a facility to convert the CP into a medium term note and vice versa. The 13-year bonds carry a refinancing risk associated with the lump sum payment of principal after the expiry of the lease. This risk is eliminated by the put option granted by PETRONAS to the bondholders.

Midciti’s strong debt service capacity is underpinned by the stability and predictability of its cash flow. The primary source of income is rental while the major outflows comprise payments under the Islamic debt securities and conventional bonds. As at 31 August 2003, the balance in the Sinking Fund was RM273.5 million, which comfortably covers the next profit/coupon payments due in November 2003 and May 2004.