MARC said today that it had placed its AA-ID(cg) issue rating on KMCOB Capital Bhd's (KMCOB) RM630 Million Murabahah Medium Term Notes (MTN) Programme on MARCWatch Negative. It also placed its AA- issue rating on Scomi Group Bhd's (Scomi) RM500 Million MTN Programme on MARCWatch Negative. The rating actions affect RM480 million of outstanding notes issued by KMCOB and RM200 million of outstanding notes issued by Scomi under their respective MTN programmes.

The issue ratings on KMCOB and Scomi are equalised to reflect MARC's view that Scomi Oilfield Limited (SOL) is a core entity of Scomi Group. SOL is providing a full and unconditional guarantee of timely payment of profit and any due principal to KMCOB's notes.

MARC placed the ratings on MARCWatch following a recent extension sought from noteholders by KMCOB for payments due into its Finance Service Reserve Account (FSRA) by June 14, 2011. MARC understands that the noteholders of KMCOB have consented to a three-month extension to September 2011 for the funding vehicle to meet its deferred FSRA obligations totalling RM75 million.

The MARCWatch placement also reflects MARC's concerns that SOL and Scomi may have difficulty maintaining their financial profiles commensurate with their current issue ratings after weaker-than-expected performances in 2009 and 2010 stemming from difficult industry conditions and corresponding deterioration in their credit metrics. SOL's 2010 pre-tax losses widened to USD8.3 million from USD1.7 million a year ago, before turning around with a pre-tax profit of USD2.7 million for the first three months of 2011 (1Q2011). Scomi, meanwhile, posted a net loss of RM204.6 million for 2010, of which RM111.2 million was the share of impairment of goodwill in Scomi Marine Bhd, before turning around with a pre-tax profit of RM16.8 million in 1Q2011. The weaker financial performances have eroded the headroom of both entities under their financial covenants.

MARC notes the considerable reliance placed on asset disposals to generate the liquidity for debt repayments in 2012, beyond KMCOB's near-term FSRA payment obligations. Scomi had also encountered a setback to its earlier announced plan to dispose its Indonesia-based coal logistics and offshore business for RM550 million, evidenced by the recently announced termination of negotiations with a prospective buyer. MARC notes that Scomi is in negotiation with another prospective buyer on the said disposal. The group will also be relying on proceeds from the disposal of certain segments within the oilfield service businesses to provide the means for KMCOB to deleverage and address upcoming debt maturities.

MARC has met with Scomi to obtain clarity on the events leading up to the apparent tightening of the group's liquidity position and to discuss management's plans to address KMCOB's deferred FSRA obligations. The rating agency understands that the group's tighter-than-expected liquidity in recent periods was the result of higher operational liquidity requirements at SOL, which had witnessed a pick-up in order book replenishment in the first six months of 2011. Operational liquidity requirements are expected to moderate at SOL and cash flow generation to improve in coming months with the completion of certain drilling waste management (DWM) projects and collection of corresponding trade receivables.

MARC is concerned that the group may still be challenged to make its deferred FSRA payments within the extended time frame notwithstanding the pick-up in earnings and cash flow amid an improving business environment. Improved day rates since March 2011 and headcount reductions are expected to support margin improvement and a better financial performance for the full year.

The MARCWatch Negative placements, which imply a one-in-two likelihood that the ratings may be lowered, are expected to be resolved by September 2011 or sooner when MARC has greater clarity on the likelihood of KMCOB's FSRA obligations being met. Evidence of Scomi and SOL's success in restoring their liquidity in the next two months could help stabilise ratings and/or outlook. Conversely, MARC could potentially lower the ratings by multiple notches upon a delay in the revised FSRA payments.

Contacts:
Gary Lim Chun Pin, +603-2082 2243 / cplim@marc.com.my;
Mac Lai Yew Weng, +603-2082 2280 / lyweng@marc.com.my;
Francis Xaviour Joe, +603-2082 2279 / fxjoe@marc.com.my.