MARC has affirmed its ratings on Bayu Padu Sdn Bhd’s (Bayu Padu) RM500 million Istisna’ Serial Bonds (Istisna’ Bonds) and RM100 million Murabahah Commercial Papers/Medium Term Notes (MCP/MMTN) at A+ID and MARC-1ID/A+ID respectively. The outlook on the ratings is maintained at stable. Wholly-owned by SapuraCrest Petroleum Bhd (SapuraCrest), Bayu Padu is a SPV set up for raising the rated facilities and lending the proceeds of the issued notes to SapuraCrest. Accordingly, Bayu Padu’s ratings reflect the credit quality of SapuraCrest Group, which is driven in large part by earnings and cash flow generation of SapuraCrest’s key operating subsidiaries. Bayu Padu’s ratings incorporate the structural subordination of its loan to SapuraCrest relative to the debt at SapuraCrest’s operating companies. MARC has taken into consideration SapuraCrest’s reliance on dividends and interest and principal payments from loans made to subsidiaries to meet its obligations to Bayu Padu. The affirmed ratings reflect the strong overall order book position of the SapuraCrest Group as well as improved consolidated profitability and cash flow metrics. These positives are moderated by the possible downside risk to earnings should the group’s expiring offshore drilling contracts be renewed at lower charter rates and the low level of liquidity at the holding company level as a majority of the group’s cash are being held at the operating subsidiary level.

SapuraCrest Group is focused in four primary lines of business: installation of pipelines and facilities (IPF), offshore drilling, marine services and operations & maintenance (O&M) services. The group has established its presence as one of the prominent local pipe laying contractors for the Malaysian oil and gas industry. The IPF division’s substantial RM5.1 billion in outstanding contract works as at October 2009 is expected to provide revenue and earnings visibility for at least the next two years. In December 2009, the IPF division secured a new 3-year contract from Petronas’ Production Sharing Contractors worth approximately RM5.0 billion to commence in March 2010. Although the IPF division has historically contributed 50% of revenue on average, MARC notes its profit contributions are lower at 22% of group operating profits. Profitability of the group is largely contributed by its offshore drilling division, which benefits from lucrative day-rate charters for its drilling rigs. This division has historically contributed about 64% of the group’s operating profits. Nevertheless, the division’s contribution to the group’s operating profits could be lower should existing drilling contracts which expire between 2010 and 2012 be renewed at lower charter rates.

The group recorded a healthy performance in financial year ended January 31, 2009 (FY2009) and nine months ended October 31, 2009 (3Q2010). Revenue generated as at FY2009 amounted to RM3.45 billion (FY2008: RM2.26 billion), while revenue recorded by the group as at 3Q2010 stood at RM2.77 billion. While revenue edged higher, group operating margins remained unchanged at approximately 11% in FY2009 and 3Q2010. Meanwhile, the group’s financial leverage measures improved as a result of its lower debt burden and improved earnings retention. The group’s debt-to-equity (DE) ratio improved to 0.6 times as at 3Q2010 (DE ratio computed as per the covenant for the same period stood at 0.5 times against the facility’s covenanted ratio of 3.0 times).

At end-October 2009, total consolidated debt of the group was RM806.6 million, of which 42.7% was accounted for by the rated facilities of Bayu Padu. SapuraCrest (holding company) did not have any other significant borrowings on its balance sheet apart from the amount due to Bayu Padu. Meanwhile, the dividends from the subsidiaries to the holding company and interest income received by the holding company of RM66.1 million and RM11.8 million, respectively in FY2009 were sufficient to cover finance costs on the rated facilities and dividend payments of RM23.6 million and RM17.5 million, respectively during FY2009. MARC notes that SapuraCrest maintains a nominal level of liquidity at the holding company level as cash is deployed at operating subsidiaries. Nevertheless, MARC also notes that as at FY2009, implied liquidity of RM613 million was available for the holding company in the form of amounts due from its subsidiaries, in addition to dividends from its subsidiaries and interest income.   

The stable outlook on the ratings assumes that the financial performance of SapuraCrest’s key operating subsidiaries should remain stable and that management will balance its strategic objectives with prudent financial policies to preserve SapuraCrest Group’s credit quality.

Contacts:
Ahmad Rizal Farid, 03-2090 2253 / arizal@marc.com.my;
Eric Chua, 03-2090 2245 / cheekiong@marc.com.my;
Anandakumar Jegarasasingam, 03-2090 2250 / kumar@marc.com.my