RAM Ratings puts Esso's P1 rating on Rating Watch, with negative outlook

Published on 26 August 2011
RAM Ratings has placed the P1 rating of Esso Malaysia Berhad’s (Esso or the Company) RM300 million Islamic Commercial Papers Issuance Programme (2011/2018) (Sukuk Programme) on Rating Watch, with a negative outlook. The Rating Watch is premised on our concerns that Esso's credit profile would deteriorate after the exit of its controlling shareholder, Exxon Mobil Corporation (ExxonMobil), following Philippines-based San Miguel Corporation’s (San Miguel or the Group) proposed acquisition of ExxonMobil’s entire 65%-stake in Esso.



Esso’s P1 rating had incorporated ongoing support and expectation of high likelihood of extraordinary support from its parent, ExxonMobil. “As an integral part of ExxonMobil’s business in Malaysia, Esso benefits from the sharing of technology and technical expertise. The Company is also able to leverage on the financial strength of ExxonMobil. As at end-June 2011, about 60% of Esso’s short-term borrowings comprised loans from ExxonMobil’s affiliates. As such, the impending change in Esso’s majority shareholder is expected to have an adverse impact on the Company’s credit profile,” opines Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

As the world’s largest non-state-owned integrated oil and gas major, ExxonMobil’s financial metrics remained robust as at end-December 2010, with a funds from operations (FFO) debt cover of about 3.0 times and a gearing ratio of under 0.5 times. It boasted a superior liquidity position, with USD8.45 billion of cash reserves against USD2.79 billion of short-term debts. In contrast, San Miguel’s financial standing is weaker; its FFO debt cover stood at about 0.1 times with its gearing ratio came up to around 1.5 times as at the same date.

Traditionally involved in the food, beverage and packaging businesses, San Miguel has diversified into the petroleum, power, mining and infrastructure industries. Its assets include the Philippines’ largest oil-refining and marketing company, with a 38%-share of its local market. The Group had previously made known its near—to-medium-term plans that include investing in new businesses. An aggressive debt-funded expansion strategy could further impinge upon the Group’s financial metrics. Furthermore, we have no visibility on San Miguel's financing plans for the Esso acquisition.

We understand that the completion of the transaction is subject to many levels of approval that could take up to 12 months to secure. In the interim, Esso’s operations are expected to remain status quo and that the Company will continue benefiting from the financial muscle of ExxonMobil.

The Rating Watch will be resolved once we have conducted an assessment of San Miguel and the possible implications of the acquisition on Esso’s business and financial risk profiles. The P1 rating could be lowered if there is a wide disparity between the credit profiles of ExxonMobil and San Miguel and/or deterioration in Esso’s business and financial risk profiles arising from ExxonMobil’s exit. We may reaffirm the rating if our assessment indicates that Esso's new ownership structure will be able to provide strong financial support to the Company and have no material negative impact on its business risk profile, along with a financial risk profile that remain within the rating parameters.
On 17 August 2011, Esso announced that San Miguel had proposed to acquire the Company’s 175,500,000 ordinary shares - representing 65% of Esso’s voting shares - from ExxonMobil International Holdings Inc, pursuant to a sale and purchase agreement executed on the same day. Upon completion of the proposed acquisition, San Miguel is required to extend a mandatory takeover offer to acquire the remaining Esso voting shares it does not already own. Concurrently, San Miguel has proposed to acquire ExxonMobil’s wholly owned affiliates, ExxonMobil Malaysia Sdn Bhd and ExxonMobil Borneo Sdn Bhd.

RAM Ratings' Rating Watch highlights a possible change in an issuer's sukuk rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated sukuk under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.

Issues will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

Media contact
Evelyn Khoo
(603) 7628 1075
evelyn@ram.com.my