MARC has downgraded its rating on Vastalux Capital Sdn Bhd’s (VCSB) RM100 million Sukuk Musyarakah facility to BB+IS from A+IS and placed the rating on MARCWatch Negative. VCSB 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 service contracts awarded by the Petronas group. Vastalux is the principal operating subsidiary of Bursa-listed Vastalux Energy Berhad (VEB). The downgrade is triggered by a shortfall in VCSB’s sinking fund account as of September 23, 2010. The MARCWatch Negative incorporates an increased likelihood of default in relation to the facility’s final redemption which will be due in three months. As at September 23, 2010, the facility’s sinking fund account balance stood at RM21.0 million, with a shortfall of RM4.0 million.

Vastalux is an oil and gas services company which undertakes offshore hook-up and commissioning, offshore topside and onshore facilities maintenance services and onshore fabrication works as well as charter of marine vessels. The Musyarakah facility financed seven Vastalux projects, including the Hook-Up and Commissioning Contract (HUC Contract) 2004/2007, HUC 2007/2010 and Top-side Major Maintenance Contract (TMM Contract) awarded by Petronas Carigali Sdn Bhd. The collection proceeds of identified receivables from these contracts are received in the facility’s revenue account, twenty percent of which is transferred into the sinking fund, which is the source of repayment for the Sukuk Musyarakah facility.

Although MARC was earlier made to understand that the suspension of Vastalux’s Petronas license was not likely to affect the collectability of the identified receivables, the lack of progress in the collection of claims issued for substantial portions of completed works has resulted in insufficient amounts being accumulated in the sinking fund. As at June 30, 2010, the outstanding identified receivables stood at RM49.3 million, however, only RM4.7 million has been invoiced. Based on a 20% retention rate on collected proceeds, MARC opines that it is unlikely that VCSB will be able to accumulate the remaining shortfall before the final redemption is due on December 23, 2010.

Based on unaudited financial statements for the first quarter of the financial year ending December 31, 2010 (1Q2010), VEB recorded a consolidated pre-tax loss of RM8.3 million (FY2009: RM69.7 million). Vastalux has appointed an advisory firm to undertake a Proposed Debt Restructuring Scheme (PDRS) exercise to address the repayment of debts to its creditors. The company had also obtained a restraining order from the High Court of Malaya in order to convene a meeting of its unsecured creditors for the purpose of considering the PDRS.

MARC understands that Vastalux has proposed to revise the principle terms and conditions of the facility, which will entail an extension of the tenure for the remaining shortfall for up to three years, and the facility agents are in the midst of preparing the draft resolutions to bondholders. The MARCWatch Negative incorporates the likelihood of default of the final redemption of RM25 million based on the original redemption date of December 23, 2010.

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