Malaysian Merchant Marine Bhd - 2009/2010 Credit Commentary Report

MARC has downgraded its rating on Malaysian Merchant Marine Bhd’s (MMM) RM120 million Al Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) to BB+ID from A-ID. At the same time, the rating was removed from MARCWatch Negative where it had been placed on December 17, 2009. The downgrade reflects increased risk that MMM may not be able to plug the funding gap that currently exists with respect to its available liquidity vis-à-vis its upcoming RM24 million BaIDS redemption in November 2010. Given its very limited external financing alternatives, the company’s BaIDS repayment strategy is focused on the disposal of one of its three remaining tankers, the timing of which remains highly uncertain. Additionally, the downgrade incorporates the company's narrow business focus, continued operating losses and declining liquidity position. The outlook for the rating is negative and reflects MARC’s expectation of continued pressure on MMM’s credit profile in light of the challenging operating environment and its currently modest and limited revenue diversification.

Since MARC’s last rating action on December 17, 2009, MARC had met with MMM’s management to discuss its operational strategies and plans to address the shipping company’s deteriorating credit profile as well as its November 2010 debt maturity of RM24 million. For the six months ended September 30, 2009, MMM saw continued erosion of its capital base and cash levels with a reported pre-tax loss of RM11.8 million. MMM has been posting recurring operating losses since the financial year ending August 31, 2006 as a result of chemical tanker regulations which became effective in January 2007. The International Maritime Organization (IMO) regulations had affected the ability of MMM’s fleet of four single hull chemical tankers to participate in the commercial transportation of vegetable oil, which has driven its weak results since. MMM is principally involved in the provision of shipping services, ship management and ship chartering services, and derives its revenue from chartering out its chemical tankers. Although the company has successfully disposed of two of four single hull vessels and is in the midst of a fleet renewal programme to replace its single hull tankers with double hull tankers, the initiatives have yet to arrest the deterioration in its key financial metrics. Furthermore, the current weak tanker industry fundamentals have dampened the prospects for the successful disposal of its double hull tanker, MMM Ashton and profitable employment of its two newbuildings currently under construction. Management has informed MARC that earnings and cash flow visibility for the newbuildings are supported by vessel hire contracts.

MMM, however, is confident of securing debt funding for the two new chemical tankers it is scheduled to take delivery of in 2010, but remains highly reliant on the sale of MMM Ashton to fund the redemption of the BaIDS. MMM is hopeful that the sale of the tanker will generate USD11 million for the RM24 million BaIDS redemption in November 2010. However, MARC continues to view the timing and proceeds of the sale as uncertain. MARC will continue to monitor the progress of MMM’s attempts to sell MMM Ashton and other means to improve its liquidity. The rating could be lowered further if there is no further progress made on its asset disposal and/or the asset sale is unsuccessful. The BaIDS is also vulnerable to further downgrade given that the current rating action could trigger a mandatory prepayment event in relation to a RM40 million loan, potentially precipitating a cross-default.