MARC has downgraded Malaysian Merchant Marine Berhad’s (MMM) RM120.0 million Al-Bai’ Bithaman Ajil Serial Bonds (BaIDS) rating from AA-ID to A-ID with negative outlook; underscored by the concern on the rapid deterioration in its financials stemming from very poor financial results announced for the financial year ended 31 August 2006 (FY2006) as well as other adverse financial impacts vis-à-vis its ageing fleet, aggravated by softening freight rates in most of the shipping segments it is involved in. The downgrade also reflects potentially weaker financial flexibility on the part of MMM/the Group to finance its fleet renewal and/or expansion initiatives amidst high capital expenditure requirement coupled with prevailing steep vessel prices in the market.

MMM is principally involved in the provision of shipping services, ship management and ship chartering services with a fleet of ten (10) vessels serving the Group’s tanker, dry bulk carriage and vehicle carriage segments. For FY2006, the Group recorded a loss before tax of RM146.8 million (FY2005: RM5.7 million profit) against RM97.7 million revenue (FY2005: 127.0 million) on account of higher off-hire days due to machinery repairs and unscheduled maintenance as well as the loss of revenue arising from the disposal of income-generating vessel during the period under review.

The loss suffered in FY2006 was largely attributed to a sizeable impairment charge and dry-docking expenditure written off, totalling RM96.73 million following the changes in the regulatory environment, including prohibition of carriage of hazardous and moderately hazardous chemical cargoes via single hull tanker (MARPOL 73/78 Annex II), thus adversely impacted potential earnings of four (4) out of ten (10) MMM’s vessels. Other negative factors include obsolescence of MMM’s vessels equipment as well as escalation of dry-docking expenditure due to the ageing factor which prompted MMM to write off those expenditure.

Moving forward, MMM will focus more on its tanker division with its strategic alliance cum 40% shareholding in Manila Merchant Marine Shipping Corporation (MMMSC) in the Philippines to increase participation in the contracts to ship petroleum products. The Group has received its first delivery of a double hull oil/chemical tanker in August 2006 and envisages to acquire additional three (3) more tankers in 2007 for the Philippines project. To increase its revenue base, MMM has embarked on the in-charter of dry bulk carriers which is expected to increase the Group’s cargo carrying capacity in excess of 150,000 DWT tonnes in 2007.

Despite lower total borrowings amounted to RM166.8 million in FY2006 (FY2005:RM188.2 million), MMM’s debt leverage surged more than two fold to 1.47 times (FY2005: 0.71 times) as a result of eroded shareholders’ funds due to the loss suffered. As stipulated under the issue structure, MMM is required to maintain a debt to equity ratio of less than 2.0 times at all times.