Assar Chemicals Sdn Bhd - 2009

MARC has affirmed its long-term rating on Assar Chemicals Sdn Bhd’s (ACSB) RM150 million Serial Sukuk Musyarakah (Sukuk) at AAAIS. The outlook on the rating is maintained at stable. MARC notes the significant transfers of cash to ACSB’s related companies in the past two financial years which predisposes ACSB to higher liquidity risk and has reduced headroom with respect to its FSCR covenants. However, the rating continues to be supported by stable revenue generation of ACSB supported by the long-term agreement with high credit standing terminal users, namely Petronas Dagangan Berhad (PDB) and Shell Timur Sdn Bhd (STSB) and prompt collection of monthly payments from the two terminal users, which form the source of ACSB’s debt servicing.

ACSB is 100%-owned by Assar Senari Sdn Bhd, which is linked to the Sarawak state government through a 20% ownership by Yayasan Sarawak, and was incorporated to undertake the construction of an independent oil terminal (IOT). ACSB signed a Musyarakah contract with the Sukukholders for the purpose of constructing and leasing the IOT, which is located in Senari, Kuching. The Sukuk trustee holds a beneficial interest in the IOT on behalf of the Sukukholders. The IOT is leased to ACSB pursuant to a lease agreement between the Sukuk trustee and ACSB. Contracted monthly tariffs charged to terminal users allow for cost recovery of the project and fund the serial redemption of the Sukuk which commenced in August 2008. The terminal commenced its operations on January 2007, and serves as a centralised storage facility for bulk petroleum products and liquefied petroleum gas. ACSB’s related company IOT Management Sdn Bhd, in which PDB and STSB have direct shareholding of 20% and 10% respectively, was appointed to manage, operate and maintain the oil terminal for a period of 30 years.

ACSB’s revenue of RM24.9 million in FY2008 is derived from IOT tariff collections, which were 6.0% lower than the previous year. Administrative and operating expenses were 10.7% higher, resulting in a lower profit before tax of RM6.8 million (FY2007: RM8.8 million). Nevertheless, operating profit margin in FY2008 remained high at 62.3%. ACSB’s financial results for the first nine months of 2009 produced a profit before tax of RM5.3 million on the back of revenue of RM19.4 million. Operating margins remained close to previous levels at 60%, given the relative stability of its operations. Meanwhile, ACSB’s balance sheet continued to improve with lower debt from the scheduled redemption of the Sukuk coupled with an increase in retained earnings. The debt-to-equity ratio stood at 2.6 times as at year-end 2008 and continued  to  decline  to 2.1  times  as at  September  2009, below  the  covenanted  limit  of  4.0 times. However, ACSB’s operating cash flow decreased to RM12.8 million as at end-2008 compared to the previous year’s CFO of RM16.4 million, due to an increase in amounts due from its holding company, Assar Senari Holdings Sdn Bhd and other related entities to RM26.3 million in FY2008 from RM17.2 million FY2007. 

According to the terms of the Sukuk, ACSB is required to maintain an FSCR coverage of 1.2 times. ACSB’s FSCR as at end-2008 stood at 1.3 times compared to 2.1 times as at end-2007, reflecting the lower debt coverage. MARC notes that the FSCR covenant of 1.2 times is lower than that applicable for other AAA-rated issuers. According to the terms of the Sukuk, once Sukuk payments and financial covenants have been met, ACSB is entitled to request for any excess balances thereafter to be utilised for its own purposes. However, the increase in advances to related company indicates ACSB will continue to have to operate with modest available liquidity and limited headroom with respect to its FSCR covenants. This is currently mitigated by the consistency and sufficiency of cash flows from the tariff payments, as well as prompt collection of monthly payments from the two terminal users which is matched to its debt obligations.

Therefore, ACSB’s rating going forward will be sensitive to slower payment collection, given ACSB’s reliance on ongoing cash flow from operations to service its debt, and changes in credit profile of either one or both terminal users.

Major Rating Factors

Strengths

Challenges/Risks