MARC has lowered its debt rating on Petra Perdana Berhad's (Petra Perdana) RM800 million Dual Currency Revolving Facility to A- from A+ and removed the rating from MARCWatch Negative. The rating action affects RM175 million of outstanding secured serial bonds and RM25 million of medium-term notes issued under the facility. The downgrade reflects declining revenues, negative cash flows, a heavy debt and lease burden and continuing weak market conditions. The outlook on the rating is negative, reflecting MARC's view that the persistent weak market conditions in the offshore support vessel (OSV) segment in which Petra Perdana primarily operates will continue to pressure cash flow and earnings protection measures.

Petra Perdana is the operator of the second largest OSV fleet by tonnage domestically and fifth largest in the region. The rather extensive modernization and expansion of its fleet since 2007 has expanded Petra Perdana's anchor handling tug supply (AHTS) vessel fleet to 16 from 9. AHTS vessels accounted for 16 of its current fleet size of 23 vessels. The fleet expansion programme's focus on larger AHTS vessels has, however, increased Petra Perdana's exposure to cyclical domestic and regional offshore exploration and development activity. The OSV operator's substantial lease burden is also a result of its fleet expansion programme.

The pressure on charter rates over the past several months and a slowdown in domestic and regional offshore exploration and development activity has adversely affected Petra Perdana's financial results. Petra Perdana recently reported a half year pre-tax loss of RM30.7 million for the first six months of 2010 (1H2010). MARC believes that the likelihood for a protracted period of earnings weakness is high and that management will be challenged to stem the deterioration in its profitability and cash flow coverage measures. Also weighing on its operating performance is the lay-up of six aged vessels that are awaiting disposal.

Petra Perdana recently raised RM111.7 million in cash from a private placement and rights issue to shore up its liquidity and balance sheet. The collection of amounts due from related entities, meanwhile, added another RM49.3 million to its cash position. Nonetheless, MARC believes that the group will still be challenged to reverse its negative cash flows and fund its cash burn until market conditions improve. Petra Perdana's cash burn in the first two quarters of 2010 appears significant, as implied by its consolidated net cash flow from operations of negative RM63.9 million. Additionally, its upcoming debt maturities of RM99 million in FY2011 and annual operating lease obligations of around RM105 million are expected to place heavy demands on its liquidity resources.

MARC will continue to monitor Petra Perdana's cash flow generation, covenant compliance and liquidity closely in coming months.

Contacts:
Eric Chua, +603-2082 2245 / cheekiong@marc.com.my
Ahmad Rizal Farid, +603-2082 2253 / arizal@marc.com.my
Anandakumar Jegarasasingam, +603-2082 2250 / kumar@marc.com.my