PECD Bhd - 2007

MARC has revised its outlook on PECD Berhad’s (PECD) RM200 million serial fixed rate bonds to Negative from Developing following PECD’s announcement to Bursa Malaysia on 6 July 2007 that its wholly owned subsidiary, Peremba Construction Sdn Bhd (PCSB) had been served notices of termination of employment for contracts under its Oceana Development, Palm Jumeirah Project in Dubai, United Arab Emirates. At the same time, the BBB- rating on PECD’s bonds was affirmed.

The contract terminations will affect approximately 20% or RM115.6 million of PECD’s outstanding order book. MARC is of the view that this recent development will intensify the Company’s ongoing operating challenges and will undermine prospects for a near-term recovery in credit protection measures. The BBB- rating on PECD’s bonds continue to reflect its weak operational and financial risk profile even as it seeks to execute a turnaround with the support of its new shareholders. MARC’s negative outlook reflects increased probability of a downgrade of the bond rating with rising uncertainty as to the timing of meaningful improvement of PECD’s credit profile notwithstanding its impending recapitalization exercise.

PECD is a domestic public-listed construction company, which has since 2004, ventured offshore and secured contracts in Dubai, Sudan and Indonesia. PECD has recently entered into a joint venture with Dubai Investment Group LLC (DIG) and Dubai Properties LLC (DP) to enhance its presence in the Middle East.

PECD’s credit measures have weakened in recent years as a result of aggressive efforts, mostly in terms of pricing, to break into the Middle East construction market. Furthermore, it continues to carry RM1.3 billion of unsettled claims in respect of four projects in its books, namely that of Prince Court Hospital, Precinct 11 in Putrajaya, Melut Basin Marine Export Terminal in Sudan and Dubai International Financial Centre. In FYE2006, PECD recognized contract revenue of RM578.5 million to the extent of contract cost incurred that is considered recoverable and is classified as accrued billings in respect of claims on variation orders submitted to customers pending assessment and certification of payment. As the resolution of such claims typically involves negotiation, arbitration and perhaps even litigation, MARC has taken a more conservative view of the affected revenue and earnings numbers. Apart from PECD’s thin margins which offer little room for error, MARC views with concern the recurring incidences of contract termination, project delays and cost overruns to the extent that the Group’s capacity to close new contracts may be impaired.

PECD’s new substantial shareholder since February 2007, Cita Laksana Sdn Bhd, had provided RM30 million in advances to the Group to meet its short term liquidity needs. PECD is proposing a rights issue with warrants that is expected to raise up to RM172.5 million to be utilized for the investment in a new proposed joint venture with DIG and DP, pare down bank borrowings and working capital requirements. The new shareholders have also provided undertakings amounting to RM37.5 million in aggregate to subscribe for new equity under the rights issue. MARC views positively their commitment to strengthen PECD’s financial profile and their active involvement in negotiations aimed at resolving certain of PECD’s unsettled claims.