MARC has revised its MARCWatch status of its MARC-2ID/A-ID ratings on Oilcorp Berhad’s (Oilcorp) RM70.0 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes Facility (MUNIF/IMTN) to MARCWatch Negative from Developing. MARC is concerned that a prolonged dispute would affect Oilcorp’s access to capital and may result in potential exposure to disciplinary action by the regulators. The ratings have been placed on MARCWatch since May 22, 2008, following an announcement made by Oilcorp concerning the accounting dispute with its then auditor, Baker Tilly Monteiro Heng (“BTMH”), over the recognition of earnings on its Plant Biofuels Corporation Sdn Bhd (PBC) project. In its announcement made to Bursa Malaysia on July 29, 2008, Horwath had apparently declined appointment as Oilcorp’s incoming external auditor in place of BTMH.  Delay in the submission of its financial statements could affect the timing of its planned listing of its property arm, D’Tiara Corp Ltd, on the London Stock Exchange’s Alternative Investment Market.

In the event Oilcorp’s profit is restated to RM7.0 million from RM22.0 million due to a revision in the PBC contract amount to RM90.0 million from RM110.0 million, this would result in a revised finance to equity (F/E) ratio of 1.41 times as opposed to 1.32 times based on the earlier qualified audited figures. This is still below the maximum covenanted F/E ratio of 2.5 times under the MUNIF/IMTN issue structure.

The Oilcorp Group is involved in the oil and gas, property investment and deep-sea fishing sectors. The oil and gas division contributed about 90% to Oilcorp’s revenues of RM444.7 million based on the earlier published FY2007 accounts. For the three-month period up to March 31, 2008 (1Q2008), Oilcorp registered a revenue of RM104.5 million but pre-tax profit declined by 36% to RM4.0 million from the previous corresponding period. Its liquidity position appears to have significantly weakened due to its high outstanding trade receivables, as reflected by its deficit operating cash flow of RM110.0 million during 1Q2008.

Nevertheless, the first scheduled reduction of the MUNIF/IMTN amounting to RM20.0 million is due October 2009 which requires Oilcorp to build up the sinking fund six months ahead of the redemption date.

MARC will monitor the above developments and will continue to assess the impact on the current ratings.