MARC has downgraded PSSB Ship Management Sdn Bhd’s (PSM) RM40 million Bai Bithaman Ajil Islamic Securities (BAIS) rating to BB-ID from BBB-ID. The rating outlook is negative. The downgrade is prompted by PSM’s continuing failure to rectify covenant breaches, particularly in relation to the provision of audited accounts, and its non-compliance with respect to the required minimum balance to be maintained in its Debt Service Reserve Account (DSRA). PSB’s failure to set aside monies in the DSRA raises serious concerns about its ability to fund upcoming debt service payments, which MARC has not been able to assess due to lack of availability of information. The negative outlook on the rating reflects uncertainty surrounding PSM’s financial fundamentals and incorporates the possibility of further downward rating action in the event PSM is unable to cover the shortfall in the DSRA and restore compliance with covenants under the BAIS.

PSM’s ongoing covenant breaches include failure to furnish semi-annual and annual audited accounts for the past three years, the last five quarterly budgets and the lack of information on the reconciliation of its semi-annual actual financial statements with its yearly operating budget. In addition, the company has not confirmed its Debt Service Cover Ratio for financial year ended December 31, 2007 (FY2007) as required by the trust deed for the BAIS issue. MARC is therefore unable to determine PSM’s cash and borrowing availability and current liquidity position.

PSM is a special purpose funding vehicle established by its holding company, PSSB Strategic Holdings Sdn Bhd (PSSB), to issue the BAIS which will be repaid from annual rental proceeds of RM8.8 million due from the government under a 10-year time charter of its vessel, currently deployed under the Royal Malaysian Navy’s training programme. The time charter ends in 2010, a year before the final BAIS redemption date in December 2011.

The outstanding amount on the BAIS currently stands at RM25 million. As of November 4, 2008, its DSRA stood at approximately RM5.5 million but according to the terms of the trust deed, the minimum balance to be maintained in the DSRA is RM6.9 million, which translates into a shortfall of about RM1.4 million as of date. PSM, however, has previously been able to meet its profit and principal payments on the BAIS. Upcoming debt service obligations under the BAIS include a RM848,750 profit payment and RM5.0 million principal redemption due December 15, 2008.

MARC will continue to monitor payments into the DSRA closely.

Contacts:
Hafizan Haron, 03-2090 2238/ hafizan@marc.com.my;
Amy Teoh, 03-2090 2259/ amy@marc.com.my