Midciti Resources Sdn Bhd - 2007

MARC has reaffirmed the AAAID rating on Midciti’s 8 to 12-year Secured Bai Al-Dayn Bonds with a nominal value of up to RM1,605 million (Serial Bonds) and the AAA(s) rating on its 13-year Bonds with a nominal value of up to RM1,315 million.

The reaffirmed ratings and the stable ratings outlook reflect the credit strength of PETRONAS, the head lessee of the PETRONAS Twin Towers (Tower 1 and Tower 2), under a 15-year triple net lease agreement. The pre-agreed lease rentals fund profit, interest and principal payments on the fully-amortising Bai Al-Dayn and conventional bonds. Under the head lease agreement, PETRONAS wholly retains the risk of lower occupancy levels, sublease terminations and sublessee credit risk. The head-lease has a shorter maturity (September 30, 2012) than the 13-year bonds which mature on November 16, 2012. Accordingly, the 13-year bonds are structured with a put option which entitles bondholders to sell the bonds to PETRONAS at face value on their maturity date. PETRONAS has also agreed to cover coupon payments between October 1, 2012 and the maturity date of the bonds. The ratings of both issues reflect MARC’s assessment that they can be equated from a credit standpoint with an unconditional, unsubordinated, and general obligation of PETRONAS, taking into consideration the essentiality of the towers to PETRONAS. PETRONAS’ implied senior unsecured obligation rating of AAA reflects its superior credit strength, drawn from its favourable production profile, strong profitability and cash flow measures, sound capitalisation and its strategic role in the Malaysian economy.

Midciti is the owner of the PETRONAS Twin Towers, two 88-storey towers located within Kuala Lumpur City Centre, 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 head lessee will pay Midciti agreed rental irrespective of the underlying occupancy levels. The agreement also provides for an increase in the rental rate every 3 years at a compounded rate of 3%, effectively insulating Midciti from potential market-driven rental declines. PETRONAS bears the fit out, operating and maintenance costs.

Midciti’s revenue is solely derived from the rental payments made by PETRONAS whilst its expenses comprise mainly financing costs relating to its Islamic and conventional bond issuances. The company’s revenue increased 4.6% to RM306.1 million in FY2007 as compared to RM292.5 million in FY2006, reflecting a rental revision made in October 2006 from RM24.4 million to RM26.6 million per month. Profit before tax for the year was significantly boosted by a gain in fair value adjustment of RM600 million arising from the adoption of the new and revised FRS 140 Investment Property.

Midciti’s debt service capacity remained strong underpinned by the stability and predictability of the rental income stream. Net cash flow from operations (CFO) increased marginally to RM257.0 million in FY2007 (FY2006: RM255.8 million), providing CFO interest coverage and DSCR of 2.1 times and 2.0 times respectively.

The rated bonds are Midciti’s only debt obligations. As at 30 November 2007, the outstanding principal amounts were RM698.0 million in respect of the Bai Al-Dayn Serial bonds and RM600.0 million in relation to conventional 13-year bonds. As of March 31, 2007, its debt-to-equity ratio was 0.4 times, down from 1.1 times in FY2006 following the final redemption of CP/MTN facility amounting to RM129.6 million in November 2006, and on account of increased shareholder’s funds.