MARC has downgraded PSSB Ship Management Sdn Bhd’s (“PSM”) RM40.0 million Bai Bithaman Ajil Islamic Securities (“BAIS”) rating from AID to BBB- ID and removed PSM’s rating from MARCWatch Negative where it had been placed in November 2007. The rating carries a negative outlook. The rating downgrade reflects MARC’s view that there has been significant deterioration in PSM’s credit quality and that liquidity could erode further due to higher operating cost expected. In addition, MARC remains concerned as to the insufficient build up of funds in the Debt Service Reserve Account (“DSRA”) and the existence of commingling risk of funds with respect to rental collections from the government, which represents the source of debt service for the BAIS. As of February 4, 2008, the balance in the DSRA stood at RM3.4 million against the estimated amount of RM7.2 million, which forms part of the scheduled build up towards the final profit and principal payments amounting to approximately RM10.7 million. To date, the company has yet to furnish its semi-annual and annual audited accounts for the past two years. In addition, PSM has also yet to furnish the Trustee with the latest quarterly operating budget, monthly Operating Account (“OA”) statement and semi-annual actual operating statement to be reconciled with the yearly operating budget of the OA.  Additionally, MARC has not obtained information on the outcome of PSSB’s earlier request for an upward adjustment in rental from the government.

The negative outlook incorporates MARC’s expectation of increasingly challenging operating environment arising from escalating operating costs vis-a-vis fixed rental collections under the vessel time charter. This could impair PSM’s liquidity position further and its ability to meet its debt service obligations.

PSM is a special purpose funding vehicle established by PSSB to issue the BAIS which will be repaid from annual rental collections due from the government under a ten-year time charter of a vessel currently deployed under the Royal Malaysian Navy’s training programme. The time charter ends in 2010 whilst the final BAIS redemption occurs in December 2011.

PSM met its third redemption of the BAIS due on December 14, 2007 amounting to RM5.0 million, leaving the outstanding balance of the BAIS at RM25.0 million. The DSRA balance of RM3.4 million as at February 4, 2008, is sufficient to service the profit payment due in June 2008.

PSM is vulnerable to further downgrade if it fails to ensure timely collection of its receivables to meet its next BAIS redemption of RM5.0 million and the required build up in the DSRA prior to the scheduled redemption in December 2008.