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Press Release
29 Mar | Friday
RAM Ratings reaffirms AAA/Stable rating of sukuk issued by KLCC REIT’s funding conduit

RAM Ratings has reaffirmed the AAA/Stable rating of Midciti Sukuk Berhad’s (Midciti Sukuk) Sukuk Murabahah Programme of up to RM3.0 bil in Nominal Value (2014/2044) (the Sukuk). As Midciti Sukuk is a special-purpose financing vehicle of KLCC Real Estate Investment Trust (KLCC REIT or the REIT), the rating of the Sukuk reflects the credit profile of the REIT. Midciti Sukuk has no operations of its own and depends on inter-company payments to meet its obligations.  
 
The reaffirmation of the rating is premised on our anticipation that the REIT’s performance will remain superior, supported by stable and strong assets. The REIT had maintained its leverage and gearing ratios at a healthy 0.14 times and 0.17 times, respectively, as at end-December 2018. Moreover, its fixed-charge coverage ratio and funds from operations financing coverage ratio of 7.88 times and 0.35 times, respectively, are expected to stay broadly unchanged going forward. These are backed by strong operating cash flows of more than RM400 mil annually and an exceptional net property income margin of 94.93%. With the Sukuk’s RM500.00 mil principal becoming due in April 2019, KLCC REIT’s annual rollover is envisaged to fall to more manageable levels from fiscal 2018’s 43.08% (fiscal 2017: 24.90%), given the management’s expressed intention to stagger the refinanced amount over five to seven years.  
 
Based on RAM’s methodology for parent-subsidiary rating links, we view the relationship between Petroliam Nasional Berhad (PETRONAS) and the REIT as “close” by virtue of the former’s strategic ownership of the latter’s assets, particularly the PETRONAS Twin Towers. The strength of the relationship is also clearly demonstrated by PETRONAS’s position as the main lessee for PETRONAS Twin Towers and Menara 3 PETRONAS, under long term, triple-net lease agreements. More recently, PETRONAS showed its support for the REIT in 2017 when it took up vacant space previously occupied by ExxonMobil, bringing the occupancy rate of Menara ExxonMobil back up to 100.00% (from 60.00%), with a favourable head lease term of 18 years. In view of the current negative outlook on the office sector, the more than seven-year remaining lease term of the REIT’s offices as at end-2018 provides cashflow stability and visibility in the medium term, markedly reducing the risk of negative rental reversion and a prolonged void period.

The revision of the Guidelines on REITs in 2018 by the Securities Commission Malaysia to allow REITs to conduct development activities does not significantly benefit KLCC REIT. Being part of the KLCCP Stapled Group (the shares of KLCC Property Holdings Berhad and the REIT are stapled together by a “stapling deed”) has already enabled the REIT to undertake development activities via the Stapled Group. This structure gives the REIT a pipeline of future asset developments, which support the management’s targeted yield.

Analytical contact
Irfan Afifah Mohd Zaki
(603) 3385 2551
irfan@ram.com.my
 
Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 Date of release: 29 March 2019

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2019 by RAM Rating Services Berhad

 
 
 
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