Offshoreworks Capital Sdn Bhd - 2009

MARC has affirmed its ratings of AA-IS and MARC-1IS / AA-IS on Offshoreworks Capital Sdn Bhd’s (OWC) RM200 million Sukuk Musyarakah (Sukuk Musyarakah) and up to RM150 million Musyarakah Commercial Papers/Medium Term Notes Programme (MCP/MMTN) respectively (collectively referred as the Sukuk). At the same time, the outlook on the ratings has been revised to negative from developing.

The revision of the outlook to negative is prompted by the group’s aggressive working capital management as evidenced by its lengthening creditor days. MARC believes that this would increase the potential for supply risk and service flow disruptions. The group’s ability to improve its liquidity profile and working capital management would be a key factor in MARC’s resolution of the negative outlook on the ratings, particularly in light of its enlarged order book and modest level of available liquidity.

The affirmed ratings continue to reflect the credit quality of contract revenue assigned by OWC’s parent, Offshoreworks Holdings Sdn Bhd (OHSB) and/or its subsidiaries, in addition to the relatively tight covenants under the Sukuk, which include built-up principal payments channelled into trustee-controlled accounts. As such, the Sukuk benefits from a rating uplift from the stand-alone rating of OHSB after MARC’s assessment of the Sukukholders’ exposure relative to OHSB’s performance risk. The ratings also incorporate the group’s recent success in securing more long-term contracts as compared to previously and its established position as a niche services provider to the oil majors.

OHSB continues to establish itself as a niche oil and gas support service provider specialising in underwater diving works as well as geophysical surveys and hydrographic & oceanographic surveys. In 2008, OHSB secured contracts worth RM503 million, while within the first half of FY2009, it managed to secure another RM966 million worth of contracts. This consequently enlarged its total order book to about RM2.0 billion as of 1H2009, out of which RM1.5 billion are yet to be completed. This augurs well for the group’s revenue generation going forward as well as meeting its contract cover under the Sukuk’s financial covenant. As at end-June 2009, OHSB comfortably complied with its contract coverage ratio (CCR), which stood at 5.9 times against the required 2.5 times of the financial covenant.

In FY2008, OHSB recorded a substantial 93% year-on-year increase in revenue to RM365.4 million from RM187.2 million in FY2007 on the back of much higher progress claims from its larger order book. For the first half of 2009, OHSB recorded a total revenue of RM203 million. With its current outstanding order book, revenue generation going forward until at least end-2011 is expected to be stable. Operating margins continued to increase to 13.8% as at 1H2009 from 8.1% in FY2007. OPBIT interest coverage, however, declined to 3.7 times as at 1H2009 (as at end-2008: 4.6 times) due to the issuance of the Sukuk, but is expected to moderate from higher earnings.

OHSB’s debt-to-equity ratio (DE ratio) increased to 1.5 times at end-1H2009 (end-2008: 0.7 times) due to the increased debt amount from the Sukuk issuance during that period. Meanwhile, after excluding non-distributable reserves largely arising from the revaluation of vessels for the Musyarakah assets, OHSB’s adjusted DE ratio stood at 3.0 times as at 1H2009 (as at end-2008: 1.9 times). In addition, MARC notes that OHSB’s cash available for its working capital purposes stood at RM60.8 million as at 1H2009. Having said this, OHSB’s rather tight working capital position, in particular its stretched payables, are a near-term credit concern for MARC as the initial high mobilisation costs has exerted pressure on available liquidity and may pose challenges to the timely execution of its enlarged order book. However, the agency notes that the working capital requirements of the recently secured long-term contracts are spread over the term of the contracts. Hence, the resolution of the negative outlook will depend on the company’s ability to adequately address its liquidity and working capital position.

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