MARC has removed MHS Aviation Berhad’s (MHSA) A+ID rating on its RM140 million Junior Notes Issue (JNs) from MARCWatch Developing, and affirmed the rating with a Stable Outlook.

The rating was placed on MARCWatch Developing on November 8, 2006 due to initial concerns that the grounding of MHSA’s three Super Puma helicopters under charter to Exxon Mobil Exploration & Production Malaysia Inc (EMEPMI) and PETRONAS Carigali Sdn. Bhd. (PCSB) related to a publicized aircraft incident offshore Terengganu could meaningfully impact the company’s credit profile. MHSA’s exposure is currently estimated to be around RM5.25 million.

On January 30, 2007, a controlled-landing incident was reported in Miri, this time involving a helicopter on lease to MHSA which was carrying offshore workers of PCSB. This brings the total number of MHSA-related aircraft incidents to four since April 16, 2005. The last two incidents had each involved one fatality.   

MARC garnered comfort following discussions with MHSA’s management during which the findings of the investigations in respect of the two incidents, and resulting implications for the demand of its helicopter services were explained in detail. MARC understands that these incidents have been thoroughly investigated and that there were no common features in the incidents apart from the use of Super Puma helicopters. The investigations have not revealed any operational lapses. Importantly, MHSA has provided assurance that its customer confidence has emerged relatively unscathed under the circumstances. No contract has been cancelled thus far. Furthermore, MHSA continues to be the dominant provider of helicopter services to oil majors in the country from its bases in Kertih, Kota Bharu, Miri and Labuan.

In FY2005, MHSA’s revenue contracted marginally by 0.8% to RM229.0 million on the back of lower flight hours. Its financial results at the earnings before interest, tax, depreciation and amortization (EBITDA) level have exhibited a downward trend for the past 5 years. The company’s FY2005 financial results were shored up by gains on disposal of fixed assets. Information on FY2006’s performance is not available as yet; the last audited accounts available are for full-year 2005.

The rating outlook is stable notwithstanding the continuing erosion of operating performance at MHSA’s level, which MARC believes to be essentially the outcome of management’s strategic financial decision to separate asset ownership from operation. More specifically, the recent deterioration in MHSA’s cost base can be traced to rising lease payments to MHSA’s holding company, DRIR Equities Sdn Bhd (DRIR), in respect of leased aircraft. (DRIR owns 90.0% of MHSA.) While it is acknowledged that a return to stronger earnings and cash flow levels as exhibited at the onset of the notes issuance is not likely to occur, failure to maintain MHSA’s financial metrics within rating expectations or a material worsening of the company’s operating environment could bring pressure to bear on the current rating.