MARC has reaffirmed the ratings of Midciti Resources Sdn Bhd’s (Midciti) Private Debt Securities (PDS) Facilities as follows:

The reaffirmation of the ratings which carries a stable outlook, reflects the strong issue structure governing the Bai Al-Dayn and 13-year Bond facilities; the good payment track record of Midciti to-date and the strong credit profile 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 primary source of repayment for the outstanding Bonds). Midciti’s 7-year Secured Bai Al-Dayn Commercial Paper/Medium Term Notes Financing Programme with nominal value of up to RM1,000 million (CP/MTNs) was fully redeemed in November 2006.

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 due to a timing mismatch, as the head lease agreement between Midciti and PETRONAS will expire on 30 September 2012 while the facility will mature on 16 November 2012. However, a put option granted by PETRONAS to the bondholders to redeem any outstanding Bonds at maturity and to meet coupon payments from 1 October 2012 until maturity of the Bonds fully mitigates this risk.

Midciti’s strong debt service capacity is underpinned by the stability and predictability of its cash flow.  The company’s primary source of revenue is rental income while its 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. Over the same period, revenue was maintained year on year as rental payments, which are not due for revision, remain unchanged. Pre tax profits however increased due to lower finance and administrative costs.