MARC has placed its AA-ID rating on KMCOB Capital Berhad’s (KMCOB Capital) RM630 million Murabahah Medium Term Notes (MTN) facility on MARCWatch Developing. The MARCWatch action is based on plans by KMCOB to refinance the outstanding MTN under the rated facility with a view to extend the maturity profile of its debt. The proposed refinancing exercise is expected to help KMCOB Capital to restore its cash flow coverage measures which have weakened significantly in the nine months to September 30, 2009 primarily due to challenging operating conditions throughout the global drilling waste management industry. MARC expects a new facility to be negotiated with current noteholders to reflect the potential for continued weaker-than-expected business conditions and to improve KMCOB Capital’s debt maturity profile. KMCOB Capital is a special purpose vehicle, incorporated to issue the said facility to consolidate borrowings under Scomi Group Bhd’s oilfield services division. The facility incorporates a corporate guarantee by Scomi Oiltools Bermuda Limited (Scomi Oiltools), which is 100% owned by Scomi Oilfield Limited (SOL), which in turn is 76.1%-owned by Scomi Group Bhd.

Scomi Oiltools has established itself as the third-largest global player with a 12%-market share in the global drilling waste management industry and maintains a meaningful presence in the global drilling fluids solutions market. The company’s operations are located in 29 countries and cater to a well diversified client base of international oil majors. After achieving compounded annual growth of 25.4% in revenues between FY2005 and FY2008, the decline in global drilling activities resulted in an 18% contraction revenue for the first nine months of FY2009 on an annualised basis. The slow pace of order book replenishment has resulted in a decline in the outstanding order book to USD399 million in September 2009 from USD432 million in December 2008. The current order book position provides little earnings visibility beyond end-2010. The integrated oilfield services business under Scomi Oiltools is a core operation of Scomi Group Bhd accounting for 68% of revenue and 57% of pre-tax profits in 3QFY2009.

The decline in drilling activities in the Western hemisphere, particularly in US, UK and Norway, has resulted in escalated competition between the global players. This was not anticipated at the time Scomi Oiltools’ debt-funded expansion was implemented. Scomi Oiltools’ financial performance has fallen considerably short of the forecast annual average growth of 26% for the three-year period from FY2008 through FY2010. The resulting significantly lower-than-projected earnings and cashflow will affect the company’s ability to maintain its covenanted debt service coverage ratio based on the facility’s original debt reduction schedule which commences in December 2010. Based on unaudited management accounts, SOL’s debt-to-equity ratio as at September 30, 2009 stood at 1.45 times, including RM630 million MTN outstanding under the facility.

The MARCWatch Developing placement reflects the risk that the refinancing may not close and that cashflow at SOL will not be sufficient to comply with current financial covenants. MARC will monitor the progress of the refinancing and resolve the MARCWatch or provide updates as greater clarity emerges on KMCOB Capital’s refinancing exercise.

Contacts:
Eric Chua 03-20902245/ cheekiong@marc.com.my;
Ahmad Rizal Ahmad Farid, 03-2090 2253/ arizal@marc.com.my;
Anandakumar Jegarasasingam 03-20902250/ kumar@marc.com.my;