The ratings of Midciti Resources Sdn Bhd’s (Midciti) Bai Al-Dayn Bonds and 13-year Bonds have been reaffirmed at AAAID and AAA(s) respectively, with a stable outlook. The Secured Bai Al-Dayn Commercial Paper/Medium Term Notes Financing Programme was fully redeemed in November 2006. The reaffirmation of the ratings reflect the strong issue structure of the Bai Al-Dayn Bonds and 13-year Bonds; the good payment track record of Midciti and the credit strength of PETRONAS, the principal tenant of the PETRONAS Twin Towers (Tower 1 and Tower 2), which undertakes to pay the rental payments for both towers. The rental stream forms the primary source of repayment of the debt securities.

Midciti is the owner of the PETRONAS Twin Towers, which comprise two 88-storey towers costing RM2.81 billion. Midciti is 49.5% owned by KLCC (Holdings) Sdn 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 will pay Midciti rental payments for both towers irrespective of the underlying occupancy levels, thus eliminating the risks of vacancy and rent defaults. PETRONAS directly bears the fit out, operating and maintenance costs. 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 13-year bonds carry a refinancing risk associated with the lump sum payment of principal after the expiry of the lease as the facility will mature on 16 November 2012, after the expiry of the lease on 30 September 2012. However, the risk is eliminated vide a put option granted by PETRONAS to the bondholders of the 13-year Bonds to acquire the facility at face value upon its maturity and to also cover coupon payments for the period commencing 1st October 2012 until the maturity of the facility. PETRONAS’ superior credit strength is drawn from its robust cash flow generation capacity that is supported by a favourable production profile, strong profitability measures, a sound capital structure and its strategic role in the Malaysian economy.

Midciti’s strong debt service capacity is underpinned by the stability and predictability of its cash flow. The primary source of revenue is rental income while the major outflows comprise payments under the Islamic debt securities and conventional bonds. In FYE2006, net cash flow from operations (CFO) was strong at RM255.8 million representing a CFO interest coverage of 2.1 times. Although revenue remained unchanged year on year as a rental revision is not due, pre tax profits have increased due to lower financing and administrative costs.