Midciti Resources Sdn Bhd - 2011

MARC has assigned a AAAIS rating to Midciti Resources Sdn Bhd’s (Midciti) proposed 10-year RM880.0 million Sukuk Musharakah Islamic Medium Term Notes programme (Sukuk). The Sukuk proceeds will be primarily used to purchase the company’s existing rated debt securities and cancel the same. The Sukuk issuance will extend Midciti’s debt maturity profile and adequately address the refinancing risk associated with the 2011 and 2012 bond maturities of the following issuances which MARC has affirmed:

• Secured Bai Al-Dayn Bonds maturing November 16, 2011 at AAAID ; and
• 13-year bonds maturing November 16, 2012 at AAA(s).

All the ratings carry stable outlook.

Midciti is the owner of the 88-storey PETRONAS Twin Towers which are located in Kuala Lumpur City Centre. Midciti’s overall favourable credit characteristics are derived largely from its irrevocable head lease agreement with its ultimate holding company, Petroliam Nasional Bhd (PETRONAS), which provides the company with stable earnings. PETRONAS, rated AAA/stable on the basis of public information, bears all downside risks with respect to sub-lease arrangements, in particular lease rollover risk, sub-lease tenant credit risk and the risk of declining occupancy levels under the triple net lease arrangement. The national oil company is also responsible for the insurance and maintenance cost of the PETRONAS Twin Towers. Lease rent is subject to upward revision every three years under the head lease agreement, protecting Midciti from a decline in commercial real estate market fundamentals while capping upside gains. The AAAIS rating on the Sukuk is based on MARC’s understanding that the current head lease agreement which expires in September 2012 will be replaced by a new agreement with terms no less favourable than those of the current agreement. PETRONAS has provided an irrevocable letter of undertaking to extend the lease agreement for the purpose of the Sukuk issuance. The lease extension will be for 15 years with a minimum rent of RM349.3 million per annum. MARC considers this level of rental income to be more than sufficient to meet obligations under the Sukuk.

For financial year ending March 31, 2011 (FY2011), Midciti’s profit before tax decreased to RM262.1 million (FY2010: RM647.3 million) as a result of the fair value adjustment of the two twin towers in accordance  with  the FRS140 Investment  Property  accounting standard. Excluding the RM400.0 million fair value adjustment of the building in FY2010 (FY2011: nil), pre-tax profit would record a 6.0% increase, arising mainly from lower financing cost incurred during the year. For FY2011, Midciti generated cash flow from operation (CFO) of RM297.2 million (FY2010: RM285.8 million), while CFO interest coverage and debt service coverage ratio were both higher at 3.55 times (FY2010: 2.96 times) and 1.67 times (FY2010: 1.61 times). Based on end-March 2011 financial statements, Midciti’s pro-forma Debt-to-Equity (DE) ratio will increase marginally to 0.20 times (FY2011: 0.18 times) upon completion of the refinancing exercise.

The stable outlook on the ratings reflects MARC’s expectation of PETRONAS’ continued commitment to Midciti as head lessee of the PETRONAS Twin Towers and extension of the lease on terms that would allow Midciti to sustain its sound cash flow position.

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