KMCOB Capital Bhd - 2011

MARC has assigned a rating of A+IS(cg) to KMCOB Capital Berhad's (KMCOB) proposed RM343.1 million Sukuk Murabahah Medium Term Notes (Sukuk Murabahah) programme with a stable outlook pending final documentation review. The proposed facility has the benefit of corporate guarantees from Scomi Oiltools and its existing and future principal subsidiaries and the listed entity that may be incorporated to facilitate the listing of Scomi Oiltools in the future. Proceeds from the Sukuk Murabahah offering will be used to redeem KMCOB’s outstanding RM390.0 million notes under its existing rated RM630.0 million Murabahah Medium Term Notes (MMTN) programme.

The Sukuk Murabahah is based on the Islamic financing concept of tawarruq or commodity murabahah and entails the purchase of shariah-compliant commodity and subsequent sale of the commodity to KMCOB at a cost plus profit sale price on a deferred payment basis. KMCOB will then sell the commodity and utilise the proceeds to refinance outstanding MMTN.

KMCOB is a special purpose funding vehicle established for the purpose of issuing debt securities on behalf of Scomi Group Berhad’s (Scomi) oilfield services businesses. It is a wholly-owned subsidiary of Scomi Oiltools Bermuda Limited (Scomi Oiltools), the immediate holding company of Scomi’s oilfield services subsidiaries. Scomi Oiltools is 100% owned by investment holding company Scomi Oilfield Limited (Bermuda) (SOL), a 76.1%-owned direct subsidiary of Scomi.

MARC's rating on the new programme reflects consolidated credit risk profile of Scomi Oiltools and its subsidiaries (the group) in that KMCOB’s repayment capacity is derived from these entities. The rating reflects the group’s leading position in the drilling waste management (DWM) and drilling fluids (DF) oilfield support services segments, its improving financial metrics beginning the second half of 2011, as evidenced by the announced results of SOL, and efforts to pare down debt in order to put the group on a stronger financial footing. The rating agency views the recent completion of the group’s disposal of its US and Mexico DWM assets and businesses positively and opines that the Sukuk Murabahah will satisfactorily address earlier credit uncertainties and concerns with respect to the low liquidity levels at KMCOB relative to its forthcoming debt maturities under its existing MMTN programme. The Sukuk Murabahah will lengthen KMCOB’s debt maturity profile and improve its liquidity position while the group’s reduced debt leverage would increase its ability to weather cyclical downturns.

Currently constraining its rating is the group’s sensitivity to the vagaries of oil and gas markets, in particular the exploration and production (E&P) budgets of oil majors, and the execution risk associated with its plan to pare its debt further with proceeds from the disposal of its Western Africa businesses and assets.

MARC’s financial analysis is based on the published financials of SOL; as an intermediate holding company, Scomi Oiltools is not required to prepare consolidated financial statements. Given that SOL is a non-operating holding company with no other immediate subsidiaries than Scomi Oiltools, the rating agency considers the published financials of SOL as representative of the performance and credit metrics of the Scomi Oiltools.  MARC notes that SOL turned around with a pre-tax profit of USD11.8 million for the nine months ended September 30, 2011 (9MFY2011) after two consecutive years of losses and improved operating profit margin of 8.41%. Its order book shows healthy replenishment with the uptick in drilling activity, particularly in Malaysia. Cash flow from operations (CFO) for FY2010 declined to USD33.5 million (FY2009: USD58.6 million) and as a means to conserve cash to meet its forthcoming debt commitments, there were no major capital expenditures, resulting in free cash flow of USD58.6 million and USD30.6 million in FY2009 and FY2010 respectively.

In November 2011, the group concluded the disposal of its US and Mexico DWM assets and businesses to the US-based National Oilwell Varco, Inc. (NOV) for total cash consideration of USD35.0 million. The net proceeds of RM90.0 million were used to prepay an equivalent amount of outstanding notes under KMCOB’s existing MMTN programme. SOL proposes to pay down another RM46.9 million of borrowings in December 2011 from its operating cash flow. SOL’s gearing as measured by debt-to-equity ratio as at end-9MFY2011 stood at 1.40 times (x) (FY2010: 1.38x) as losses in FY2010 reduced shareholders’ funds by 13.2% to USD145.1 million (FY2009: USD164.2 million). MARC notes the recent US and Mexico asset and business disposals would result in one-time charges of approximately RM87.8 million for SOL; after accounting for debt repayments of RM136.9 million in the current financial year, pro-forma gearing should decrease to 1.36x.

The stable outlook takes into account the group’s meaningful progress to date with regard to initiatives to strengthen its financial profile and redefine its business profile. The outlook also reflects expectations that the improved industry fundamentals will aid satisfactory cash flow generation while planned asset divestitures would improve financial flexibility, with proceeds reducing borrowings and funding continuing businesses.

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