MARC AFFIRMS ITS AAAIS RATING ON MIDCITI RESOURCES SDN BHD’S RM880 MILLION SUKUK MUSHARAKAH IMTN PROGRAMME

Dec 31, 2012 -

MARC has affirmed its AAAIS rating on Midciti Resources Sdn Bhd’s (Midciti) outstanding RM880 million Sukuk Musharakah Islamic Medium Term Notes (IMTN) Programme. The outlook on the rating is stable. Midciti is a 76.1% indirect subsidiary of Petroliam Nasional Berhad (PETRONAS) and is the owner of the 88-storey PETRONAS Twin Towers. Rental payments from PETRONAS as the head lessee of the PETRONAS Twin Towers under a triple net lease agreement between the national oil company and Midciti will constitute the principal and profit payments under the programme. The affirmed rating reflects the creditworthiness of PETRONAS as the head lessee of the PETRONAS Twin Towers and implicit support provided by PETRONAS as the ultimate parent of Midciti. MARC currently maintains a public information rating of AAA/stable on PETRONAS based on the national oil company’s favourable business risk profile and credit metrics.

The rating affirmation, however, does not incorporate the recent proposal to inject PETRONAS Twin Towers into a real estate investment trust (REIT). MARC notes that the proposal is in the early stages and is subject to approvals from various authorities, including the IMTN noteholders. MARC understands that the outstanding sukuk will likely be refinanced by a new debt issuance under the REIT structure.

For the IMTN programme, MARC draws comfort that while a new agreement to replace the head lease agreement which had expired on September 30, 2012 is pending finalisation, PETRONAS has provided a letter of undertaking in the interim to extend the lease agreement for 15 years to September 30, 2027. The extension incorporates PETRONAS’ irrevocable guarantee to make contractual rental payments of not lower than the current rental rate of RM29.1 million per month, or RM349.3 million per annum, irrespective of occupancy levels. Additionally, the triple net lease provisions of the previous agreement have been retained. As a result, MARC observes that the sukukholders are insulated from the credit risk of sub-lessees, occupancy rate of the towers and the risk of fluctuations in rental rates. 

For the nine months financial period ended December 31, 2011 (FP Dec 2011), Midciti’s profit before tax increased significantly to RM1,110.6 million (FYE March 2011: RM262.1 million), mainly due to the fair value appreciation of the building by RM900.0 million in accordance with the FRS 140 Investment Property accounting standard. Excluding the fair value appreciation of the towers, Midciti’s annualised pre-tax profit would have increased by 7.2% from FYE March 2011 due mainly to lower interest costs. The company’s cash flow coverage ratios, namely its CFO interest coverage and debt service coverage ratio declined to 2.41 times (FYE March 2011: 3.55 times) and 0.4 times (FYE March 2011: 1.67 times) respectively in FP Dec 2011 due to higher cash payments to suppliers. Midciti’s leverage position as reflected by its debt-to-equity ratio improved to 0.17 times in FP Dec 2011 (FYE March 2011: 0.19 times) as a result of higher retained profits during the review period. Midciti’s borrowings consist solely of the outstanding RM880 million sukuk under the rated facility. The next repayment of RM280 million is due for redemption on October 3, 2014.

The stable outlook on Midciti’s rating reflects the stable outlook on its ultimate parent, PETRONAS and the expectation that support would be forthcoming from the latter, if required.

Contacts: 

Nisha Fernandez 03-2082 2269/ nisha@marc.com.my;

Jasmine Kua 03-2082 2280/ jasmine@marc.com.my;

Rajan Paramesran 03-2082 2233/ rajan@marc.com.my