MISC Bhd - 2012

MARC has affirmed the ratings of AAAID and MARC-1ID /AAAID on MISC Berhad's (MISC) RM2.5 billion Islamic Medium Term Notes (IMTN) and RM1.0 billion Murabahah Commercial Papers/Medium Term Notes (CP/MTN) programmes respectively, and concurrently revised the outlook on the ratings to stable from negative. The rating action affects RM1.3 billion of outstanding notes under the rated programmes.

The outlook revision and rating affirmation follows the announcement of MISC's financial results for the financial year ended December 31, 2012 which showed deleveraging efforts and a return to profitability in the second quarter ended June 30, 2012 after two consecutive quarters of losses.

While the group's operating profit from continuing operations increased modestly, its 2012 full year pre-tax profit increased by US$222.5 million compared to 2011 mostly as a result of one-time gains and significantly reduced impairment provisions. MISC's exit from the container shipping business has helped the group to stem outsized losses that have plagued its liner business in recent years. The group’s on-balance sheet debt fell to US$3.06 billion as at end-2012, from US$4.47 billion a year ago as proceeds from asset dispositions were used for the repayment of debt and to free up debt capacity.

Although MISC is still expected to face challenging conditions for the balance of 2013, support for the current ratings are currently provided by 1) MISC's mix of energy-related shipping business; its long-term contracts of its LNG shipping and offshore businesses continue to provide some degree of revenue and cash flow stability to offset its cyclical petroleum and chemical shipping businesses; 2) its moderate financial management policies; 3) the strong financial flexibility it derives from being a majority-owned subsidiary of Petroliam Nasional Berhad (PETRONAS) which MARC maintains a senior unsecured rating of AAA/Stable based on public information; and 4) ongoing efforts to strengthen the company's financial profile beyond 2013.

MISC's capital spending needs are expected to remain high based on its announced unaudited capital spending commitments of US$5.10 billion as of year-end 2012, limiting internal cash flow generation. MARC believes that MISC's sizeable capital spending over the next 12 to 24 months, combined with cyclical  weakness  within  the  petroleum and  chemical  shipping segments, will prevent significant near term improvement to cash flow protection measures. That said, MARC expects MISC's improving operating performance and its reduced debt leverage to increase its resilience to a continued difficult operating environment. 

MISC's affirmed short-term rating also reflects its manageable debt maturities and comfortable liquidity position. As of end-December 2012, 31% of its total borrowings or US$935.5 million were classified as short-term. Cash and cash equivalents were about US$1.31 billion, largely unchanged from a year ago.

MARC continues to consider MISC as a strategically important subsidiary of PETRONAS; MISC's operating relationship with PETRONAS as captive provider of its LNG shipping needs provides considerable competitive advantages to MISC. Also, PETRONAS has a strong track record of providing financial support; the national oil company provided an undertaking to take up all shares not subscribed by other shareholders on top of taking up its full allocation under MISC's rights issue in 2010. On January 31, 2013, PETRONAS announced that it had issued a conditional takeover offer to MISC's board of directors for the remaining 37.33% equity interest in the subsidiary that it does not hold, which if completed as planned would make MISC a wholly-owned subsidiary of PETRONAS.

PETRONAS has indicated that upon taking full control of MISC, it would be in a position to set a clearer direction for MISC, which MARC considers to be incrementally positive from a strategic and business risk perspective as well as from a parent support perspective. However, as MARC's ratings on MISC already incorporate rating uplift from MISC's standalone credit profile for very high parent support, no rating impact is envisaged if the aforementioned takeover exercise does not proceed.

MISC is Malaysia’s leading international maritime conglomerate providing fully integrated maritime, offshore floating solutions, heavy engineering and logistics services. It is currently among the top five largest shipping conglomerates in the world by market capitalisation at RM24.0 billion as at April 1, 2013. As at end-December 2012, MISC operates a fleet of 138 vessels, of which 72% of the vessels are owned by the group. The largest contributor to consolidated revenue is the petroleum shipping segment, followed closely by the LNG shipping and heavy engineering segments. The LNG shipping segment is the largest earnings contributor for the group.

Major Rating Factors

Strengths

•  Ability to secure vessel contracts by aligning its business with PETRONAS;
•  Well diversified fleet and leading market position in LNG shipping segment;
•  Stable and recurring cash flow from LNG shipping segment and other energy businesses; and
•  Moderate financial leverage and proactive management of its debt profile.

Challenges/Risks

•  No expected turnaround in the global shipping industry in the near term;
•  Persistent negative free cash flow; and
•  High capital commitments.