MARC has assigned ratings of AA-IS and MARC-1IS/AA-IS  to Offshoreworks Capital Sdn Bhd’s (OWC) RM200 million Sukuk Musyarakah (Sukuk Musyarakah) and up to RM150 million Musyarakah Commercial Papers/Medium Term Notes programmes (MCP/MMTN), respectively (collectively referred to as ‘Sukuk’). The ratings carry a developing outlook. OWC, a special purpose wholly-owned subsidiary of Offshoreworks Holdings Sdn Bhd (OHSB), was incorporated to facilitate issuance of the Sukuk, the proceeds of which will be used to part-finance acquisition of vessels and related equipment, refinance the group’s existing borrowings and for its working capital.

The ratings are supported by the credit quality of receivables generated under contracts assigned/to be assigned by OHSB and/or its subsidiaries as well as the Sukuk’s tight covenant package. All finance service requirements and Sukuk principal repayments will be met from assigned contract revenues which will be remitted or deposited into trustee-controlled accounts. Mandatory monthly sinking fund payments and financial covenants in respect to OHSB’s consolidated gearing, minimum finance service cover and contract cover (relative to outstanding Sukuk) ratios provide protection for Sukukholders. The Sukuk is rated higher than the stand-alone credit profile of OHSB which MARC has taken into consideration in its assessment of Sukukholders’ exposure to OHSB’s performance risk. The rating also takes into account the group’s defensible market niche in diving and survey services for local and regional oil and gas companies, moderated by its small equity base and rising working capital needs in the context of its growth objectives and growing order book position as well as susceptibility to near-term spending softness among domestic and regional oil and gas players.

Under the issue structure, payment proceeds from identified contracts are remitted into a Ringgit Main Revenue Account and a Foreign Currency Revenue Account. Subsequently, proceeds from the revenue accounts are deposited into a sinking fund on a monthly basis commencing in the second year of issuance. OWC is also obliged to maintain a minimum contract cover ratio (CCR) of 2.5 times the nominal value of outstanding Sukuk in order for withdrawal of funds from the designated accounts to be permitted for the group’s operating expenses.

OHSB group, which commenced operations in 1991, has evolved into an integrated service provider in the upstream oil and gas industry, particularly in providing diving services in which it has a domestic market share of 30%, and geophysical survey services. Contract proceeds from these two core divisions will form the source of repayment of the Sukuk. The group had recently diversified into offshore construction and engineering services which are not expected to be material to its performance in the near- to medium-term.

About 70% of OHSB’s revenue is derived from short-term contracts relating to maintenance support services, which should demonstrate a satisfactory level of resilience amid the volatility in oil and gas prices. For the 11-month period ended November 30, 2008, OHSB’s underwater diving services division contributed 67% to the group’s total revenue of RM344.0 million while its geophysical survey division accounted for 16%. During the five-month period ended November 30, 2008, its revenue almost doubled compared to the first half of 2008 (1H2008) mainly due to more short-term diving and survey contracts secured and executed. Despite the strong revenue growth, the group’s operating profit margin narrowed to 9.0% from 15.6% recorded in the 1H2008 on account of higher personnel costs and overheads. Nonetheless, pre-tax profit for the 11-month period grew substantially to RM29.2 million driven by the higher number of contracted jobs secured and performed.

The developing outlook reflects the impact of uncertain oil and gas prices on the demand for oilfield services over the near- to intermediate-term and potential cutbacks in oil exploration and development spending on OHSB’s ability to grow and replenish its order book. OHSB’s order book position remains critical to its capacity to maintain compliance with the Sukuk’s financial covenants, particularly its CCR. Nonetheless, OHSB’s sizeable order book of RM703.2 million as at December 31, 2008 is expected to enable the group to at least sustain its revenue level and maintain compliance with its CCR in FY2009. Covenant compliance in subsequent years would hinge on the company’s ability to continuously secure contracts with reputable oil majors. The current rating outlook also assumes that OHSB’s stand-alone creditworthiness will be supported by the action being taken by the group to mitigate swings in working capital and short-term liquidity concerns by way of improved liquidity planning and reliance on charter vessels as opposed to vessel purchase to conserve liquidity.

Contacts:
Hafizan Haron 03-2090 2238/ hafizan@marc.com.my,
Nor Azlina Abdullah, 03-2090 2256/ norazlina@marc.com.my