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 Petroliam Nasional Bhd (PETRONAS), the head lessee of PETRONAS Twin Towers (Tower 1 and Tower 2), which are owned by Midciti. The rating actions follow MARC’s affirmation of its AAA public information corporate credit rating on PETRONAS, given its strong financial metrics, favourable production profile as well as its strategic role in the Malaysian economy. PETRONAS’ agreement to pay rental rates that increase at a compounded rate of 3% tri-annually, while bearing the fit-out, operating and maintenance costs under the head lease agreement, mitigates the risk of lower occupancy levels, sublease terminations and sub-lessee credit risk. 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, given the importance of the towers to PETRONAS.

The head lease agreement between PETRONAS and Midciti expires on September 30, 2012, earlier than the 13-year bonds’ maturity expiry 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. The company’s revenue remained unchanged at RM335.8 million in FY2009, compared to the previous corresponding period. Profit before tax for the year under review increased significantly by 56.5% to RM 469.8 million (FY2008: RM300.1 million) due to an appreciation in fair value of 233.4% to RM233.4 million (FY2008: RM70 million). Going forward, profitability will improve in line with the final tri-annual upward revision of rental income to RM29.1 million in October 2009 from the previous rate of RM26.6 million and declining financing costs in line with the projected reduction in debt levels over the period of the lease.

Midciti’s debt service capacity continues to remain strong, underpinned by the stability and predictability of the rental income from PETRONAS. Net cash flow from operations (CFO) declined marginally to RM259.9 million in FY2009 (FY2008: RM289.1 million), maintaining CFO interest coverage and debt service coverage ratio at 2.4 times (FY2008: 2.5 times) and 1.6 times (FY2008: 1.6 times) respectively in FY2009. Cash and cash equivalents at the end of year increased by RM1.4 million to RM138.9 million in FY2009, on account of lower dividend payouts.

The rated bonds are Midciti’s only debt obligations. As of November 30, 2009, the outstanding principal amount was RM387.0 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 0.3 times in FY2009 from 0.4 times in FY2008, the combined result of a RM145 million principal repayment on the Bai Al-Dayn Serial bonds and larger shareholder’s funds.

Contacts: 
Nisha Fernandez 03-20902269/ nisha@marc.com.my;
Rajan Paramesran 03-2090 2233/ rajan@marc.com.my;