Midciti Resources Sdn Bhd - 2008

MARC has affirmed the AAAID rating on Midciti Resources Sdn Bhd’s (Midciti) 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 ratings carry a stable outlook.

The affirmed ratings and the stable ratings outlook reflect the credit strength of government-owned oil and gas company Petroliam Nasional Bhd (Petronas), the head lessee of the Midciti-owned Petronas Twin Towers (Tower 1 and Tower 2) under a 15-year irrevocable 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. Petronas solely assumes the risk of lower occupancy levels, sublease terminations and sub-lessee credit risk under the agreement. 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 importance of the towers to Petronas. Petronas’ public information corporate credit rating of AAA reflects its superior credit strength, drawn from its strong profitability and cash flow, sound capitalisation, favourable production profile as well as its strategic role in the Malaysian economy.

Located on a 5.37-acre freehold site within Kuala Lumpur City Centre, the 11-year old Petronas Twin Towers comprise two 88-storey towers with a built-up area of about 5.5 million square feet and with a net book value of RM4.87 billion as of March 31, 2008 (FY2008). Midciti, an indirect subsidiary of Petronas, is 49.5%-owned by KLCC (Holdings) Sdn Bhd (wholly-owned by Petronas), and 50.5%-owned by Bursa Malaysia listed KLCC Property Holdings Bhd (31.7%-owend by Petronas), receives a monthly rental of RM26.6 million.

Under the head lease agreement, Petronas will pay the agreed rental irrespective of the underlying occupancy levels and provide for an increase in the rental rate every three years at a compounded rate of 3% which effectively insulates Midciti from potential market-driven rental declines. Petronas bears the fit-out, operating and maintenance costs. The head lease agreement expires earlier on September 30, 2012 than the 13-year  bonds’ maturity on November 16, 2012. Petronas will cover the coupon payments
between October 1, 2012 and the maturity date of the bonds. Principal redemption of the 13-year bonds, meanwhile, is provided by way of a put option which entitles bondholders to sell the bonds to Petronas at face value on maturity.

Midciti’s revenue is solely derived from the rental payments made by Petronas while its expenses comprise mainly financing costs relating to its Islamic and conventional bond issuances. In FY2008, the company’s revenue increased by 9.7% to RM335.8 million (FY2007: RM306.1 million) mainly due to an agreed rental revision in October 2006 that resulted in an increase in monthly rentals from RM24.4 million to RM26.6 million. The significant decrease in profit before tax for the year under review was mainly due to a smaller RM70 million fair value adjustment gain following the adoption of the new and revised FRS 140 Investment Property (FY2007: RM600 million).

Midciti’s debt service capacity remains strong, underpinned by the stability and predictability of the rental income streams from Petronas. The company’s net cash flow from operations (CFO) increased marginally to RM289 million in FY2008, providing CFO interest coverage and debt service cover ratios of 2.4 times and 1.6 times respectively. Midciti recorded a positive net cash flow of RM10.0 million in FY2008 compared to a deficit a year earlier, on account of lower dividend payouts.   

The rated bonds are Midciti’s only debt obligations. As of June 30, 2008, the outstanding principal amounts were RM698.0 million in respect of the Bai Al-Dayn Serial bonds and RM600.0 million in relation to the conventional 13-year bonds. Midciti’s debt-to-equity ratio improved marginally to 0.4 times in FY2008 from 0.5 times in FY2007, the combined result of a RM136 million principal repayment on the Bai Al-Dayn Serial bonds and larger shareholder’s funds.

Major Rating Factors

Strengths

• Strong credit strength of Petronas, as the head lessee of the Petronas Twin Towers;
• Petronas wholly retains the risks associated to lower occupancy levels, sublessee credit risk and sublease terminations; and
• Stability and predictability of rental income stream which funds scheduled payments on the bonds.

Challenges/Risks