MARC has reaffirmed MHS Aviation Berhad’s (MHSA) A+ID rating on its RM140 million Junior Notes Issue (JNs) reflecting its dominant position as provider of contracted helicopter air transportation services to major oil and gas (O&G) companies including Exxon Mobil Exploration & Production Malaysia Inc (EMEPMI), Sarawak Shell Sdn Bhd and PETRONAS Carigali Sdn. Bhd. (PCSB). MARC draws comfort from the fact that over 60% of MHSA’s revenue are secured by long-term contracts, translating into an element of stability to the company’s future revenue stream. While MHSA’s operating environment is dependent on the performance of the O&G industry, MARC foresees steady growth in investments in the domestic O&G industry in the near to medium term due to the fundamental strong energy demand and prevailing high prices.

The rating was placed on MARCWatch Developing on November 8, 2006 due to initial concerns that the grounding of MHSA’s three Super Puma helicopters under charter to EMEPMI and PCSB related to a publicized aircraft incident offshore Terengganu could meaningfully impact the company’s credit profile. Our findings revealed that MHSA’s exposure is currently estimated to be around RM5.25 million; considered manageable in comparison to its annual turnover which is in excess of RM200 million. Nonetheless, on January 30, 2007, a helicopter on lease to MHSA carrying offshore workers of PCSB was involved in a controlled-landing incident in Miri, which brings the total number of MHSA-related aircraft incidents to four within the space of 18 months. The last two incidents had each involved one fatality. Upon clarification with MHSA’s management, MARC understands that these incidents have been thoroughly investigated and that there were no common features in the incidents apart from the use of Super Puma helicopters. The investigations have not revealed any operational lapses. Importantly, MHSA has provided assurance that its customer confidence has emerged relatively unscathed under the circumstances. No contract has been cancelled thus far. Furthermore, MHSA continues to be the leading provider of helicopter services to oil majors in the country from its bases in Kertih, Kota Bharu, Miri and Labuan. The MARCWatch Developing was subsequently removed and the JNs rating has also been assigned with a Stable Outlook.

MHSA’s revenue contracted marginally by 0.8% to RM229.0 million in FY2005 (FY2004:RM230.8 million), on the back of lower flight hours. Its financial results at the earnings before interest, tax, depreciation and amortization (EBITDA) level have exhibited a downward trend for the past three years. The company’s FY2005 profit before tax was shored up by gains on disposal of fixed assets.

The rating outlook is stable notwithstanding the continuing erosion of operating performance at MHSA’s level, which MARC believes to be essentially the outcome of management’s strategic financial decision to separate asset ownership from operation. More specifically, the recent deterioration in MHSA’s cost base can be traced to rising lease payments to MHSA’s holding company, DRIR Equities Sdn Bhd (DRIR), in respect of leased aircraft. (DRIR owns 90.0% of MHSA.) While it is acknowledged that a return to stronger earnings and cash flow levels as exhibited at the onset of the JNs issuance is not likely to occur, failure to maintain MHSA’s financial metrics within rating expectations or a material worsening of the company’s operating environment could bring pressure to bear on the current rating.