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 Ministry of Finance of Malaysia.

Midciti Resources is the owner of the PETRONAS Twin Towers, which comprises two 88-storey towers costing RM2.81 billion. Midciti is 49.5% owned by KLCC Holdings Bhd (KLCCH) (which is 100% owned by PETRONAS), and 50.5% owned by KLCC Property Holdings Bhd (KLCCProperty) (which is 19.27% owned by PETRONAS and 31.73% owned by KLCCH).

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. Under the agreement, PETRONAS will be responsible for the rental payments of both towers irrespective of the underlying occupancy levels, thus eliminating the risks of vacancy and rent defaults. A step-up rental provision where the rental rate is increased every 3 years at a compounded rate of 3% has also been included in the Agreement. 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 CPs into medium term notes 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 October 2004, the balance in the Sinking Fund was RM344.4 million, which comfortably covers the next profit/coupon payments due in November 2004 and May 2005.