MARC has affirmed its AAA_(fg) rating on KMCOB Capital Berhad’s (KMCOB) guaranteed serial bonds of up to RM320.0 million with a stable outlook. The rating and outlook reflect the unconditional and irrevocable financial guarantee provided by Danajamin Nasional Berhad (Danajamin), which carries MARC’s insurer financial strength rating of AAA and counterparty credit ratings of AAA/MARC-1. As at end-October 2017, KMCOB has an outstanding amount of RM105.0 million under the guaranteed serial bonds, of which RM55.0 million is due on December 14, 2017.

KMCOB is a funding vehicle of parent Scomi Oilfield Limited (SOL). As such, its creditworthiness is inextricably linked to that of SOL, an oilfield services (OFS) provider that provides drilling fluids and drilling waste management services for the upstream segment of the oil and gas industry.

For financial year ended March 2017 (FY2017), SOL registered a pre-tax loss of US$23.2 million. To mitigate the significant decrease in revenue, SOL has continued to pursue cost rationalisation measures. SOL has also managed to pare down its total borrowings, improving its debt-to-equity ratio to 0.51x as of end-March 2017 in the process. Even so, SOL’s financial resilience has been materially weakened by a period of lower exploration and production activity in the oil and gas industry, earlier precipitated by low oil prices. The recent recovery in crude oil prices has yet to translate into a pickup of SOL’s order replenishment. SOL’s order book, comprised of call-out contracts, declined further to US$214.3 million as at end-March 2017 from over US$1.0 billion a year ago. The declining order book and falling active rig count for SOL’s drilling fluid segment suggest continuing downside risks for revenue and earnings, and no rebound in revenue and margin prospects going into 2018.

Most concerning in the near term, however, is SOL’s thin liquidity as evidenced by its US$11.1 million cash balance as at end-June 2017. SOL is unlikely to have sufficient liquidity to cover the repayment of its upcoming RM55.0 million bond maturity without accessing external resources. In MARC’s view, SOL’s sustained weak financial performance and thin liquidity underscores a material decline in KMCOB’s capacity for continued timely payment on the bonds. Nonetheless, the affirmed rating of AAA(fg) on the bonds continues to reflect the strength of the secondary repayment source, Danajamin, to meet upcoming as well as future debt maturities on time and in full according to the original principal terms and conditions of the bonds.

On November 29, 2017, KMCOB announced that it had obtained bondholders’ consent to revise the terms and conditions of the rated bonds including extending bond maturities beyond their scheduled redemption dates. Given the circumstances surrounding the aforementioned consent solicitation, MARC regards the default-averting maturity extensions as tantamount to a distressed debt restructuring.

Bondholders have also consented for a change in rating agency and MARC expects to withdraw the rating upon the issuer’s request. In the event MARC continues to rate the guaranteed bonds after implementation of the maturity extensions, the agency would disclose the issue’s standalone rating to convey the likelihood of similar extensions reoccurring in the future. The augmented disclosure should help bondholders assess extension risks, which are not factored in credit enhanced ratings. In general, failing to meet debt obligations in full and on time is not consistent with an investment grade rating.

MARC will continue to closely monitor developments in respect of KMCOB’s upcoming RM55.0 million bond maturity on December 14, 2017.

Contacts:
Joan Leong, +603-2717 2934/ joan@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidanq@marc.com.my.