Straight A's Portfolio Sdn Bhd - 2009 Credit Commentary Report

MARC continues to maintain its MARC-4ID rating on Straight A’s Portfolio Sdn Bhd’s (Straight A’s) RM200 million Murabahah Underwritten Notes Issuance Facility (MUNIF) on MARCWatch Negative following its downgrade of Oilcorp Berhad’s (Oilcorp) debt ratings to MARC-4ID/CID from MARC-4ID/BBID. The continuing MARCWatch Negative placement now incorporates the potential for the declaration of an event of default (EOD) and consequent acceleration of obligations under Straight A’s MUNIF to be triggered by Oilcorp’s recent interest payment default on a loan under a CLO programme and imminent default on its RM70 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes Facility (MUNIF/IMTN) on October 7, 2009, in addition to the heightened collectibility risk of certain receivables securing the Straight A’s MUNIF. The rating has been on MARCWatch Negative since September 11, 2009.

Straight A’s is a special purpose vehicle formed by Oilcorp’s wholly-owned subsidiary, Oil-Line Engineering & Associates Sdn Bhd (OLEA), for the purpose of securitising receivables from assigned contracts of OLEA and/or its subsidiaries. Straight A’s rating was lowered on September 11, 2009 to reflect the dependency on Oilcorp’s credit quality and MARC’s evaluation of the credit support derived from a corporate guarantee from Straight A’s intermediate holding company OLEA and its ultimate parent Oilcorp. MARC is of the view that the structural subordination risk faced by the noteholders of Straight A’s will be amplified by the adverse financial developments at its ultimate holding company, Oilcorp.

Oilcorp has defaulted on interest payments due to EON Bank Berhad’s CapOne CLO amounting to RM1.6 million due on September 17, 2009. The missed interest payment could lead to an event of default, which could potentially result in an acceleration of the entire loan principal of RM45 million. Oilcorp has requested for a deferral of the interest payment up to one month to October 17, 2009 but this request has not been granted yet. Oilcorp is currently an affected issuer under PN17 of Bursa Malaysia’s listing requirements and has yet to formulate a regularisation plan. MARC believes that under the circumstances, the default of Oilcorp’s MUNIF/IMTN appears imminent.

The current outstanding amount of RM80 million under Straight A’s MUNIF was drawn down with the assignment of receivables from two obligors, namely Plants Biofuel Corporation Sdn Bhd (PBC) - RM26 million; and Plant & Offshore Technology Sdn Bhd (POT) - RM54 million, originated between August 30, 2007 and April 29, 2008. MARC was informed that OLEA had received payments from POT, but has yet to transfer the said amounts to the designated accounts of Straight A’s under the rated facility, resulting in the commingling of the designated funds.

The MARCWatch Negative on Straight A’s rating incorporates the possibility of an EOD being declared as a consequence of Oilcorp’s weakened financial position and acceleration of the amounts outstanding under the facility. At this juncture, MARC understands from the trustee that the bondholders are in negotiation with OLEA for a regularisation plan.