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RAM Ratings reaffirms AAA/Stable rating of sukuk issued by KLCC REIT’s funding conduit

Published on 08 Apr 2021.

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RAM Ratings has reaffirmed the AAA/Stable rating of Midciti Sukuk Berhad’s RM3.0 bil Sukuk Murabahah Programme (2014/2044). As Midciti Sukuk is a 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. KLCC REIT owns PETRONAS Twin Towers, Menara 3 PETRONAS and Menara ExxonMobil, all of which are deemed to have superior asset quality. Having no operations of its own, Midciti Sukuk depends on inter-company payments to meet its obligations. 

The reaffirmation of the issue rating is premised on the REIT’s exceptional financial profile and resilient operating performance despite challenging operating conditions amid the Covid-19 pandemic. The long-term lease arrangement with Petroliam Nasional Berhad (PETRONAS), the master lessee of the triple-net lease (TNL) under this transaction, provides the REIT with long-term earnings certainty. The national oil company accounted for more than 90% of the portfolio’s net lettable area (NLA), apart from 60% of Menara ExxonMobil and retail space at Menara 3 PETRONAS. KLCC REIT’s lowly leveraged balance sheet and sturdy debt servicing coverage afford considerable room to withstand the adverse impact of the pandemic, especially on the retail side. 

Notwithstanding various assistance packages granted to affected retail tenants, KLCC REIT’s total revenue declined by a marginal 1.72% y-o-y to RM581.22 mil in FY Dec 2020. Notably, the retail portion of the office-centric portfolio made up only a small part (2.93%) of the REIT’s total NLA and 5.26% of revenue for the period. Despite its worldwide cost-cutting exercise, Exxonmobil – which contributes no more than 5% of the portfolio revenue and NLA – has made no indication of early lease termination nor requested rental reduction. Owing to the TNL arrangement with PETRONAS, the REIT’s overall net property income (NPI) margin stayed robust at 95.04%. As at end-December 2020, its respective leverage and gearing ratios remained low at 0.14 times and 0.17 times, with sturdy fixed charge coverage of 7.93 times – among the highest compared to peers’.

We further expect the REIT, as part of the KLCCP Stapled Group (the Stapled Group or the Group), to maintain its close linkage to its ultimate parent, PETRONAS, based on RAM’s methodology for parent-subsidiary rating links. Units of the REIT are stapled to the shares of KLCC Property Holdings Berhad (KLCCP) by a “stapling deed”. Although having divested an 8.5% interest in KLCCP Stapled Group on 11 December 2020, PETRONAS’s overall direct and indirect stake in the latter is still significant at 66.94%. Notably, PETRONAS recently extended its TNL agreement for a further term of 15 years which will run from the expiry of the current term. Rates will be determined one year before the current lease ends and will depend on market conditions. 

 

Analytical contact
Irfan Afifah Mohd Zaki
(603) 3385 2551
irfan@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 

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 2021 by RAM Rating Services Berhad



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