Following MARC’s announcement on 9 August 2007, MARC has uplifted the MARCWatch Negative rating on PSSB Ship Management Sdn Bhd’s (“PSM”) RM40.0 million Bai Bithaman Ajil Islamic Securities (“BAIS”) and concurrently downgraded the BAIS rating from A+ID to AID (A flat, Islamic Debt). The rating carries a negative outlook.

The downgrade of the BAIS facility reflects bondholders’ increased exposure to contract performance risk under PSM’s vessel rental contract with the Government arising from the consistently higher than anticipated vessel operating cost which has consequently resulted in covenant breaches, particularly with respect to the sinking fund schedule. The downgrade also takes into account PSM’s failure to adhere to timely reporting requirement to the Facility Agent/Trustee as required under the BAIS issuance. The lack of timely and complete information from PSM continues to affect MARC’s ability to undertake its annual surveillance process.

PSM is a special purpose funding vehicle established by PSSB Strategic Holdings Sdn Bhd (“PSSB”) to issue the BAIS. The Islamic securities will be repaid from 10-year annual payments of RM8.8 million per annum under the time charter of a vessel to the Government for the Royal Malaysian Navy’s (“TLDM”) training programme. Prior to 2006, the Government has been prompt in its rental payments; within 30 days after receiving the invoice, as stipulated in the contract agreement. However, in respect of 2006 rental payments, a three-month delay was observed in payment collection. At present, PSSB is awaiting payment from the Government in respect of an invoice submitted on 6 August 2007.

MARC considers adequate contract performance and timely collection of Government receivables to be of paramount importance to avoid further negative effect on the rating. MARC’s key concern is that further escalation of vessel operating costs may somewhat impair PSM’s ability to meet the stipulated minimum annual Debt Service Reserve Account (“DSRA”) requirement. Nevertheless, as at 22 August 2007, the DSRA currently stands at RM7.31 million; sufficient to service both the principal and profit payments due in December 2007.

MARC is closely monitoring PSM’s developments and will disseminate any rating implications arising therefrom.