KMCOB Capital Bhd - 2013

MARC has assigned a rating of AAA(fg) to KMCOB Capital Berhad’s (KMCOB) proposed guaranteed serial bonds of up to RM320 million (Guaranteed Serial Bonds) with a stable outlook. The assigned rating and outlook reflect an unconditional and irrevocable financial guarantee provided by Danajamin Nasional Berhad (Danajamin) for the Guaranteed Serial Bonds. MARC currently rates Danajamin at AAA/stable based on the financial insurer’s status as a government-sponsored entity and perceived high governmental support for its role in facilitating greater corporate access to the domestic sukuk and bond markets.

Proceeds from the Guaranteed Serial Bonds will be utilised for the early redemption of the outstanding amount under its existing RM343.1 million Sukuk Murabahah (Sukuk Murabahah) rated A+IS(cg)/negative. KMCOB is a funding vehicle of Scomi Oilfield Limited (SOL), an investment holding company with subsidiaries mainly involved in the provision of drilling fluids (DF) and drilling waste management (DWM) services. SOL now operates as a subsidiary of Scomi Energy Services Bhd (Scomi Energy, formerly known as Scomi Marine Bhd) following an internal restructuring exercise by Scomi Group Bhd. The restructuring saw the injection of the oilfield services unit into Scomi Energy to create an integrated oil and gas (O&G) marine and drilling services provider as well as SOL’s disposal of its loss-making Western Hemisphere business. These initiatives which were undertaken to reposition SOL for growth in key markets in South East Asia and the Middle East and enhance financial performance has contributed to improved credit measures. SOL’s business risk profile has improved post-restructuring and also as a consequence of the recovery in O&G drilling activity. SOL presently commands a market share of 65% in the DF and DWM segments of its core market, Malaysia, which provided 39% of its 15-month financial period ended March 31, 2013 (FP2013) consolidated revenue of US$342.4 million. SOL’s order book stood at US$1.54 billion as at end-July 2013, including a US$686 million project awarded by PETRONAS Carigali Sdn Bhd, the exploration and production subsidiary of Malaysia’s national oil company.

SOL’s financial performance has improved post-restructuring. SOL posted operating profit of US$32.7 million for FP2013, excluding non-recurring gain of about US$10 million. This translated to a higher operating profit margin of 9.55% in FP2013 compared to 4.67% in 2011 prior to the restructuring (before restatement) while its debt-to-equity ratio declined from the previous high of 1.63 times (x) as at end-December 2011 to 0.89x as at end-March 2013. SOL expects to gradually reduce its debt level further, aided by improved cash flow generation. SOL’s debt covenant on gearing should help limit deterioration in SOL’s leverage metrics, going forward.

SOL’s liquidity position has improved somewhat since securing working capital credit lines amounting to US$28 million in the first three months of 2013. As at end-March 2013, cash and cash equivalents stood at US$13.8 million, and MARC understands from management that SOL’s existing credit facilities together with new credit lines are expected to be sufficient to fund the company’s new projects in the financial year ending March 31, 2014 (FY2014). Earlier on, liquidity pressures at SOL had prompted KMCOB to seek a waiver of compliance with its annual debt service cover ratio for nine months. Although MARC would expect SOL’s cash generation to improve over the remainder of 2013 in light of its improving operating performance, the company’s liquidity would come under pressure if working capital requirements or capital spending result in significantly higher-than-expected cash outflows.

SOL’s financial projections reflect expectations for improved credit metrics with growing revenues, manageable capital spending and the use of free cash flow for debt reduction. Still, SOL’s operating results in recent years have reflected a vulnerability to industry cyclicality and somewhat volatile cash flow generation. Ongoing replenishment of SOL’s order book with service contracts that provide stable-to-improving margins, sound liquidity management and disciplined capital spending will be key to sustaining positive free operating cash flow and compliance with its financial covenants under the new issuance.

Bondholders are nonetheless insulated from any downside risks in relation to SOL’s credit profile by virtue of the irrevocable and unconditional guarantee provided by Danajamin. Any changes in the supported rating or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

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