MARC DOWNGRADES TANJUNG LANGSAT PORT'S RATINGS TO A-IS and MARC-2ID/A-ID; OUTLOOK NEGATIVE

Aug 18, 2011 -

MARC has downgraded its ratings on Tanjung Langsat Port Sdn Bhd’s (TLP) RM250 million Sukuk Musyarakah Bonds (Sukuk Musyarakah) and RM135 million Musyarakah Commercial Papers/Medium Term Notes Programme (MCP/MMTN) to A-IS and MARC-2ID/A-ID from AA-IS and MARC-1ID/AA-ID respectively. The outlook on the ratings remains negative.



The downgrades reflect further erosion of TLP’s credit and operating profile during 2010 due to the still lingering effects of the 2008 fire incident at its tank terminal complex and its depleting unencumbered land bank. Its larger-than-expected revenue decline and operating cash flow deficit in 2010 raises concerns over its cash flow and liquidity risks related to certain long outstanding balances due to its contractors for port construction and dredging works. In light of its depleted unencumbered land bank and current operating challenges, MARC expects TLP to become increasingly dependent on liquidity support from parent, Johor Corporation (JCorp), to fund cash flow and debt service shortfalls. The negative outlook on the ratings reflects increased concerns over TLP’s ability to stem its operating losses and cash flow deficits.

MARC understands that although one of the eight tanks at TLP’s tank terminal complex was certified as ready for operations in March 2010 followed by four more tanks in May 2010 and the sixth tank in early 2011, the storage facilities are currently not in use by the sole lessee, Trafigura Pte Ltd. MARC has been informed that the remaining two tanks which were earlier damaged by fire should be ready to resume operations by end-2011. Consequently, TLP’s tank terminal complex operations have not generated any revenue since the fire incident in August 2008, resulting in estimated monthly revenue losses of RM0.55 million. TLP recently sold its remaining unencumbered land holdings, raising total proceeds of RM134.9 million to partially pay down the RM216.1 million due to contractors. The company urgently needs to restore its cash flow and earnings through higher utilisation of its tank terminal complex, and dry and liquid cargo wharves beginning from the second half of 2011 to maintain compliance with its financial covenants and to meet its 2012 note maturities of RM20.0 million. MARC foresees that TLP will require further financial support from its parent to maintain compliance with its financial covenants.

Based on its latest consolidated audited financial statements ended December 31, 2010, TLP’s revenue declined to RM63.59 million (FY2009: RM100.15 million) due to lower land sales. Higher administrative expenses and finance costs, as well as RM14.7 million of write-offs from insurance receivables relating to the fire incident led TLP to record pre-tax losses of RM24.3 million (FY2009: pre-tax profit of RM16.1 million). TLP has initiated legal proceedings against its insurer on May 5, 2011 to recover these sums. MARC notes the conversion of amounts due to TLP’s parent into equity during 2010 which had the effect of lowering TLP’s debt-to-equity ratio to 1.68 times (FY2009: 3.33 times) against its covenanted debt-to-equity ratio of 4.0 times. At the same time, the rating agency considers the parent’s probability of providing further support as low to moderate in light of JCorp’s own heavy debt burden.

MARC will continue to monitor TLP’s operating trends as well as key financial metrics and will consider revising the outlook to stable if TLP is able to stabilise its financial and operating performance, and halt further erosion in its credit profile. To maintain its current ratings, TLP needs to demonstrate that it can generate adequate earnings and operating cash flow on a consistent basis. The ratings may be lowered if TLP is unable to stabilise its performance in the near-term and turn itself around.

Contacts:
David Lee, +603-2082 2255/ david@marc.com.my ;
Jason Kok Ching Wui, +603-2082 2258/ jason@marc.com.my ;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my .