MARC has lowered its rating on PECD Berhad’s (“PECD”) RM200 million serial fixed rate bonds to BBB- from BBB with a Developing Outlook and has removed it from MARCWatch. The rating action reflects PECD’s weakened financial profile, an increase in overall business risk and the uncertainty in the timing of any recovery in credit protection measures even as it seeks to execute a turnaround. MARC sees continuing support for PECD by its shareholders, including willingness to subscribe for a proposed rights issue, the recapitalization of the company and the resolution of long unsettled project claims as the most significant drivers of PECD’s near-term credit profile given its heightened liquidity needs.

A domestic construction company listed on the Main Board of Bursa Malaysia, PECD, possesses a twenty year track record. The company has diversified into engineering, procurement, construction and commissioning (“EPCC”) in the oil and gas sector in addition to property development. PECD ventured offshore in 2004 to counter the contraction in the domestic construction industry and has since secured contracts in Dubai, Sudan and Indonesia. PECD’s offshore projects will likely contribute more than half of the Group’s revenue in FY 2007. PECD has recently entered into a joint venture with Dubai Investment Group LLC (“DIG”) and Dubai Property LLC (“DP”), to enhance its presence in the Middle East.  The joint venture company, PECD LLC, will undertake construction and property development projects for DIG and DP. The Group is also eyeing Ninth Malaysia Plan (“9MP”) projects to fill its local order book.

PECD’s credit measures have weakened in recent years as a result of aggressive efforts, mostly in terms of pricing, to break into the Middle East construction market. Furthermore, it continues to carry RM1.3 billion of unsettled claims in respect of four projects in its books, namely that of Prince Court Hospital, Precinct 11 in Putrajaya, Melut Basin Marine Export Terminal in Sudan and Dubai International Financial Centre. In FYE2006, PECD recognized contract revenue of RM578.5 million to the extent of contract cost incurred that is considered recoverable and is classified as accrued billings in respect of claims on variation orders submitted to customers pending assessment and certification of payment. As the resolution of such claims typically involves negotiation, arbitration and perhaps even litigation, MARC has taken a more conservative view of the affected revenue and earnings numbers. Apart from PECD’s thin margins which offer little room for error, MARC views with concern the recurring incidences of contract termination, project delays and cost overruns to the extent that the Group’s capacity to close new contracts may be impaired.

PECD’s new substantial shareholder since February 2007, Cita Laksana Sdn Bhd, had provided RM30 million in advances to the Group to meet its short term liquidity needs. PECD is proposing a rights issue with warrants that is expected to raise up to RM172.5 million to be utilized for the investment in a new proposed joint venture with DIG and DP, repayment of shareholder’s advance, pare down bank borrowings and working capital requirements. The new shareholders have also provided undertakings amounting to RM37.5 million in aggregate to subscribe for new equity under the rights issue. MARC views positively their commitment to strengthen PECD’s financial profile and their active involvement in negotiations aimed at resolving certain of PECD’s unsettled claims.

The developing outlook for the rating reflects uncertainties with regard to the timeframe taken to accomplish the turnaround and rectify past operational deficiencies, PECD’s ability to close new contracts, and the short-term as well as long-term business and financial implications of new strategic joint ventures such as that with DIG and DP. As there is no headroom at the current rating level to accommodate any further continued financial underperformance, setbacks encountered during the turnaround process would most likely have negative implications.