MARC has downgraded PECD Berhad’s (PECD) RM200 million serial fixed rate bonds to BB+ from BBB-. The rating outlook remains negative. The downgrade reflects the major operational and strategic challenges currently faced by PECD as well as continued deterioration in its credit metrics, and recognizes the increased execution challenges confronting management as it pursues its turnaround strategy. MARC believes that the recent announcement by PECD of the Dubai Investment Group’s (DIG) withdrawal from a proposed tripartite joint venture with PECD and Dubai Properties, will hamper PECD’s efforts to strengthen its business profile, in particular its construction presence in the Middle East. Earlier on, PECD had announced the termination of two projects, i.e. the Greater Nile Petroleum Operating Company (GNPOC) Headquarter Building Project on 12 April 2007 and the Oceana Project on 2 July 2007. In light of PECD’s high reliance on its construction segment in respect of earnings and cash flow, MARC believes that its ability to meaningfully improve its earnings and debt protection measures will be restrained notwithstanding its impending recapitalization exercise.

For the first six months ended 30 June 2007, PECD recorded a net loss before minority interest of RM12.8 million despite a smaller loss of RM3.8 million in 2Q07 (1Q2007: RM8.9 million net loss).  Whilst the latest quarter shows a quarter-on-quarter improvement, the group is still reporting losses with only the construction division reporting profits. Furthermore, the group has been cash flow positive only in one quarter of eight quarters from 3Q05 through 2Q07. The Group is not generating sufficient cash flow to fund its debt service obligations and coupon payments have been serviced from shareholder advances. The group’s unencumbered cash balances of RM5.5 million provide limited liquidity for its debt service obligations. An impending rights issue (RI) targeted for completion by end of 2007 and several asset disposals indicate potential funding flexibility.

PECD is currently negotiating a change to the schedule for the build-up of its debt service reserve account (DSRA), to one month prior to the coupon payment vis-à-vis to maintain at all times, an amount at least equivalent to the coupon payment on the next maturity.  The Issuer is also seeking its bondholders’ indulgence on other matters including a waiver for non-compliance of its financial covenant ratio. 

The rating continues to be under downward pressure as PECD’s inability to achieve sustained recovery of operating performance will further depress the already weak earnings and debt protection measures.

PECD is a domestic public-listed construction company, which has since 2004, ventured offshore and secured contracts in Dubai, Sudan and Indonesia.