MARC has placed Malaysian Merchant Marine Bhd’s (MMM) A-ID rating on its RM120 million Al Bai’ Bithaman Ajil (BaIDS) on MARCWatch Negative to highlight concerns that MMM will not be able to accumulate enough liquidity to meet its November 2010 debt maturity of RM24 million. MARC believes that in the nine months to September 30, 2009, there has been a substantial weakening of MMM’s overall financial profile, as evidenced by a sharp decline in its unrestricted cash and cash equivalents, continued operating losses and further erosion of its capital base.  MMM’s unrestricted cash and cash equivalents after netting off bank overdrafts were negative RM5.3 million as at end-September 2009 compared to RM48.1 million a year ago. Further, MARC believes that the timing and execution risks arising from MMM’s plan to fund the BaIDS’ November 2010 redemption with proceeds from the sale of one of two existing owned tanker could likely have risen amid falling tanker prices. Apart from debt maturities, scheduled new vessel deliveries in the first quarter of 2010 will also place demands on MMM’s liquidity. The current challenging tanker market conditions dampen the prospect of a significant improvement in MMM’s near-term financial performance.

MMM is principally involved in the provision of shipping services, ship management and ship chartering services and derives its revenue from chartering out vessels on the spot tanker market. MMM is undertaking a fleet renewal programme which entails replacing its single hull tankers with double hull tankers. The company has successfully disposed two of four single hull vessels and chartered out the two remaining vessels. MMM is expected to take delivery of six chemical tankers by the first quarter of 2010, four of which will be bareboat chartered-in vessels and two will be owned vessels. Of rating concerns are the weak tanker market conditions, the downward pressure on charter rates stemming from oversupply of tankers and MMM’s high exposure to the volatile spot market for chemical tankers. MARC believes that falling vessel prices pose an additional challenge for MMM and puts the shipping company at higher risk of not being able to conclude its vessel disposal. MMM has indicated that it will rely on the disposal proceeds to fund an early redemption of the outstanding BaIDS of RM24 million.  In the course of MARC’s ongoing surveillance of the rating, the agency is unable to obtain clarity on the status of its vessel disposal plan. The worsening prospects for the disposal of the tanker and significant uncertainty as to whether the new vessels can be profitably employed heighten the downside risk to MMM’s cash flow and liquidity in coming months.
 
MMM’s 2Q2010 results continued to slide further with revenue declining by 35.8% to RM24.4 million from RM120.2 million reported in FY2009 (19-month results with change in financial year end from August 31 to March 31) while pre-tax losses stood at RM11.8 million.  MMM’s recurring losses since FY2006, with the exception of FY2009, have eroded its shareholders’ equity to RM48.1 million as at September 30, 2009 from RM264.1 million as at FY2005.  Its operational cash flow deficit has resulted in the depletion of its liquidity and lowered financial flexibility.

MMM’s sole banking line of RM12 million has been fully utilised. MARC believes that MMM will need to access other forms of external funding to meet its upcoming BaIDS redemption of RM24 million in November 2010. Additionally, MMM has an outstanding loan under a CLO programme which contains a rating trigger that would make its RM40 million borrowing due and immediately payable if MMM’s long-term rating falls below BBB.

The rating will remain on MARCWatch Negative and will likely be suspended in the event MARC is unable to obtain clarification on risk mitigating measures MMM has in place or intends to take to address the rating agency’s concerns. 

Contacts:
Lee Mei Lin 03-2090 2259/ meilin@marc.com.my,
Ryan Lee Ju Vern, 03-2090 2230/ juvern@marc.com.my