Thursday, Jan 27, 2000
Malaysian Rating Corporation Berhad (MARC) has assigned a short-term rating of MARC-1ID and a long-term rating of AID to Bumi Armada Navigation Sdn Bhd’s (BAN) RM80.0 million Murabahah Notes Issuance Facility and/or Medium-Term Notes. BAN’s ratings reflect the company’s good competitive position in the area of providing marine transportation, tanker operations and support services for the offshore oil and gas industry. Its long-term contracts with leading oil and gas multinationals, high utilization rates of vessels, and commendable health, safety and environmental operating track record which are critical in ensuring contract renewals, contribute to the company’s continued dominance in servicing this segment of the oil and gas sector. The issue structure is sound and provides adequate safety nets for servicing of the MuNIF/MTN in case of operational difficulties. These ratings are however moderated by BAN’s sole dependence on the oil and gas sector for its growth prospects and aggressive capital structure.
The current recovery in global crude oil prices is expected to revive offshore exploration and production (E&P) activities and sustain production operations. These offshore activities require marine transportation of goods such as heavy equipment, machinery and spare parts to support the offshore oil and gas production and exploration. Offshore production platforms also require standby safety vessels as the platforms are susceptible to hazards like oil spill and fire, as well as accommodation workboats, thus providing demand for BAN’s services. Nevertheless, less than robust prospective oil and gas prices could conceivably lead to reduced daily charter rates or a slowdown in E&P activities. Elements supporting the current recovery in oil prices are susceptible to reversal arising from either a backslide in complying with production restrictions and/or weakened demand growth in emerging markets. In the past, however, the impact of these factors on BAN’s operations have been negligible.
BAN is currently the leading operator of offshore support vessels in Malaysia with its fleet of 31 vessels. BAN’s high margins reflect relatively low industry competition due to four major factors; BAN’s business segment is a niche market which is not strategically-sized to warrant the involvement of major international shipping companies, the stronger US Dollar has significantly increased the cost of building new vessels, alienating smaller players which are resource-constrained, oil companies tend to favour local companies with proven abilities when offering new contracts and economies of scale accorded by the company’s fleet size. BAN is one of the few Bumiputera controlled companies with both a strong rapport with PETRONAS and an established track record in marine support services for the oil and gas sector. Contracts secured by BAN average between three and five years with renewal options. Likelihood of contract renewals is high given the group’s good safety track record, and well-maintained and specialised vessels, predicated on sustained recovery in oil prices. Fleet expansion is substantially funded by debt against firm charter contracts.
BAN’s interest cover by its funds from operations has traditionally been strong underpinned by a high degree of certainty and consistency of its cash flows from charter proceeds. Going forward, BAN’s minimum and average after tax and capex debt service cover ratio (which includes BAN’s available cash balances) is projected to be at 1.4 and 2.7 times respectively. BAN’s robust operating margin should enable the company to offset unexpected increases in operating costs and still keep its operations financially whole. BAN’s exposure to foreign exchange fluctuations stemming from its US Dollar loans, spare parts purchases and insurance premiums is mitigated by the company’s US Dollar revenues derived from its tanker and FPSO (floating, production, storage and offload) operations. BAN has been a profitable company except in FY97 due to foreign translation losses from the revaluation of its liabilities. Long-term loans ballooned 184% resulting in the tremendous deterioration in BAN’s debt-equity level to almost 40 times from just about four times in FY96. BAN’s pro-forma debt to equity ratio, however, is expected to improve to under three times in FY2000 with a positive bottomline in FY99 and FY2000.
Dividend pay-outs to the holding company, a listed entity, and repayment of shareholders’ advances have to be met from operational cash flow, in addition to debt servicing. The assignment of certain charter contracts and associated rental proceeds for the benefit of the noteholders directly into a sinking fund to be used mainly for debt servicing (includes committed principal reduction programme), first, and operating expenses, second, lend strength to the rating. The assignment also carries a condition that expired contracts be immediately replaced with those of equal value.
The current recovery in global crude oil prices is expected to revive offshore exploration and production (E&P) activities and sustain production operations. These offshore activities require marine transportation of goods such as heavy equipment, machinery and spare parts to support the offshore oil and gas production and exploration. Offshore production platforms also require standby safety vessels as the platforms are susceptible to hazards like oil spill and fire, as well as accommodation workboats, thus providing demand for BAN’s services. Nevertheless, less than robust prospective oil and gas prices could conceivably lead to reduced daily charter rates or a slowdown in E&P activities. Elements supporting the current recovery in oil prices are susceptible to reversal arising from either a backslide in complying with production restrictions and/or weakened demand growth in emerging markets. In the past, however, the impact of these factors on BAN’s operations have been negligible.
BAN is currently the leading operator of offshore support vessels in Malaysia with its fleet of 31 vessels. BAN’s high margins reflect relatively low industry competition due to four major factors; BAN’s business segment is a niche market which is not strategically-sized to warrant the involvement of major international shipping companies, the stronger US Dollar has significantly increased the cost of building new vessels, alienating smaller players which are resource-constrained, oil companies tend to favour local companies with proven abilities when offering new contracts and economies of scale accorded by the company’s fleet size. BAN is one of the few Bumiputera controlled companies with both a strong rapport with PETRONAS and an established track record in marine support services for the oil and gas sector. Contracts secured by BAN average between three and five years with renewal options. Likelihood of contract renewals is high given the group’s good safety track record, and well-maintained and specialised vessels, predicated on sustained recovery in oil prices. Fleet expansion is substantially funded by debt against firm charter contracts.
BAN’s interest cover by its funds from operations has traditionally been strong underpinned by a high degree of certainty and consistency of its cash flows from charter proceeds. Going forward, BAN’s minimum and average after tax and capex debt service cover ratio (which includes BAN’s available cash balances) is projected to be at 1.4 and 2.7 times respectively. BAN’s robust operating margin should enable the company to offset unexpected increases in operating costs and still keep its operations financially whole. BAN’s exposure to foreign exchange fluctuations stemming from its US Dollar loans, spare parts purchases and insurance premiums is mitigated by the company’s US Dollar revenues derived from its tanker and FPSO (floating, production, storage and offload) operations. BAN has been a profitable company except in FY97 due to foreign translation losses from the revaluation of its liabilities. Long-term loans ballooned 184% resulting in the tremendous deterioration in BAN’s debt-equity level to almost 40 times from just about four times in FY96. BAN’s pro-forma debt to equity ratio, however, is expected to improve to under three times in FY2000 with a positive bottomline in FY99 and FY2000.
Dividend pay-outs to the holding company, a listed entity, and repayment of shareholders’ advances have to be met from operational cash flow, in addition to debt servicing. The assignment of certain charter contracts and associated rental proceeds for the benefit of the noteholders directly into a sinking fund to be used mainly for debt servicing (includes committed principal reduction programme), first, and operating expenses, second, lend strength to the rating. The assignment also carries a condition that expired contracts be immediately replaced with those of equal value.