MARC has downgraded its rating on Vastalux Capital Sdn Bhd’s (VCSB) RM100 million Sukuk Musyarakah to A+IS from AA-IS. The outlook is stable. Vastalux Capital is a special purpose company and wholly-owned subsidiary of Vastalux Sdn Bhd (Vastalux), incorporated for the purpose of issuing the Sukuk Musyarakah largely to fund Vastalux’s working capital in relation to oil and gas services contracts awarded by Petronas group.

The downgrade incorporates the deterioration in Vastalux Group’s liquidity position as a result of the significant completed works pending finalisation of claims on its balance sheet as a consequence of purported changes in scope of works on a major contract. The continued performance of the group relies on Vastalux’s ability to complete the financed contracts within preset specifications or within time and budget, which MARC views as susceptible to current operating challenges and cash flow pressures. Nevertheless, the current rating continues to incorporate a significant amount of uplift from Vastalux’s fundamental creditworthiness on the basis of the credit support provided by pledged revenues arising from the performance of identified contracts financed under the Sukuk Musyarakah. Since initial drawdown of the Sukuk in December 2005, the transaction structure has captured RM530.0 million of revenue from contracts financed, of which RM93.2 million has been remitted into the sinking fund account (SFA). While scheduled redemptions to date have been timely, MARC’s future rating actions are more likely to be determined by the company’s ability to address the remaining shortfall of RM6.8 million ahead of the final RM25 million redemption of the sukuk in December 2010.

Vastalux is an oil and gas services company which undertakes offshore hook up and commissioning work for domestic exploration and production (E&P) operations. Vastalux is the principal operating subsidiary of Vastalux Energy Bhd which reported a consolidated pre-tax loss of RM22.2 million for the nine-months to September 30, 2009. Apart from the weaker operating performance, the group’s significant unbilled completed works has also resulted in a stretched working capital cycle and pressure on its liquidity. Its trade receivables inclusive of amounts due from customers rose to RM232.8 million as at end-September 2009, compared to the RM157.7 million revenue recorded for the nine-month period. Vastalux has been stretching payments to its suppliers to finance its liquidity mismatch, which predisposes the group to high risk of supply and/or service disruptions.

The Musyarakah facility financed seven Vastalux projects estimated to be worth RM975.35 million as at September 30, 2009, including Hook-Up and Commissioning Contract (HUC Contract) 2004/2007, HUC Contract 2007/2010 and Top-side Major Maintenance (TMM contract) projects, which account for 84.2% of the identified contracts, were awarded by Petronas Carigali Sdn Bhd (Petronas Carigali). Pledged revenues from the identified contracts are captured in a proceeds account (PA), which are subsequently credited into a revenue account (RA) to avoid commingling of funds. Transfers from the revenue account into the SFA are subsequently made to meet obligations under the Sukuk facility. As at December 31, 2009, the SFA balance stood at RM18.2 million, with a shortfall of RM6.8 million in relation to the final repayment tranche of RM25 million which needs to be accumulated at least three months before the December 2010 final sukuk redemption.

VCSB’s ability to meet the remaining shortfall depends on further collection of pledged revenue from resolution of pending claims on work done and timely collection of invoiced amounts on contracts financed by the facility. As provided for under the transaction structure, 20% of collection from the receivables will be transferred to the SFA. MARC understands that as of December 31, 2009, receivables under the financed contracts amounted to RM49.5 million, of which RM27.3 million include amounts approved and retention sums recoverable. The remaining RM22.2 million relates to change orders on completed works, for which billings can only be raised upon acceptance of documentation. MARC views the foregoing as susceptible to delay, not withstanding the company’s expected completion of the billing process by the second quarter of 2010.

The stable outlook is premised on the expectation that Vastalux will make satisfactory progress on the collection of its receivables within the next two quarters and build up the shortfall of RM6.8 million in the SFA on time. The rating could be lowered if MARC’s expectations are not met. 

Contacts:
Lee Mei Lin, 03-2090 2259/ meilin@marc.com.my
Eric Chua, 03-2090 2245/ cheekiong@marc.com.my;
Anandakumar Jegarasasingam, 03-2090 2250/ kumar@marc.com.my;