KMCOB Capital Bhd - 2010 Credit Commentary Report

MARC continues to maintain KMCOB Capital Berhad's (KMCOB Capital) AA-ID(CG) rating for its RM630 million Murabahah Medium Term Notes (MTN) facility on MARCWatch Developing where it has been placed since December 30, 2009. MARC expects to resolve the Developing Watch within the next three months upon completion of Scomi Group Bhd's (Scomi) recently announced debt rationalisation exercise for Scomi Oilfield Limited (SOL). KMCOB Capital is a funding vehicle for SOL and its MTN facility is ultimately guaranteed by SOL, which in turn, is 76.1%-owned by Scomi. The proposed debt rationalisation exercise which was announced by Scomi on March 31, 2010 is being undertaken to improve SOL's consolidated debt service profile to more appropriate levels for its cash flows and targeted for completion by June 2010.

SOL is the third-largest player in the drilling waste management industry, with a global market share of 12% and operations in 29 countries catering to a well diversified client base of international oil majors. The group's earlier debt-funded expansion has increased its debt burden while intensified competition among the global players prompted by a decline in drilling activities in the Western hemisphere has pressured its profitability; the group's profit before tax and revenue fell by 33% and 18% respectively in FY2009. Combined, these factors have caused the company's consolidated financial metrics to weaken beyond our expectations.

SOL group's cash balance of USD46.3 million (RM159.4 million) as at December 31, 2009 is adequate to support its scheduled debt maturity. Its current liquidity position has benefited from lower working capital requirements in FY2009 and the group's cash conservation strategy. Nonetheless, MARC expects operating cash requirements to increase significantly in coming months as a consequence of improved business prospects. Additionally, SOL faces significant upcoming annual debt maturities of USD43.6 million (RM150 million) in both 2010 and 2011, based on the original debt maturity schedule. Beyond 2010 and in the absence of any improvement in its debt maturity profile or external infusion of liquidity, MARC does not expect SOL’s internal cash generation ability to be sufficient to maintain key measures for the current rating - notably for its cash-to-short term debt repayment coverage to be maintained at least one time (1.0x).

MARC will closely monitor the progress of the debt rationalisation exercise and provide updates as greater clarity emerges. The rating could be lowered in the event that the exercise does not proceed and alternative remedial measures are not taken to bolster SOL's consolidated liquidity position to restore its debt service profile.