MARC AFFIRMS ITS MARC-1ID/AA-ID RATINGS ON BAYU PADU SDN BHD'S RM500 MILLION ISTISNA’ SERIAL BONDS AND RM100 MILLION MURABAHAH CP/MTN PROGRAMME

Mar 22, 2012 -

MARC has affirmed its ratings on Bayu Padu Sdn Bhd’s (Bayu Padu) RM500 million Istisna’ Serial Bonds (Istisna' Bond) and RM100 million Murabahah Commercial Papers/Medium Term Notes (MCP/MTN) programme at AA-ID and MARC-1ID/AA-ID respectively with a stable outlook. The rating action affects RM220 million of Istisna' Bonds and RM95 million of MCP notes outstanding under the rated programmes. Bayu Padu is a wholly-owned funding vehicle of SapuraCrest Petroleum Bhd (SapuraCrest).

The affirmed ratings reflect SapuraCrest group’s leadership position in pipeline installation and offshore drilling, the improvement in its consolidated profitability and the earnings visibility provided by the group’s RM10.1 billion in outstanding order book as at November 30, 2011. These strengths are moderated by the group’s exposure to currency volatility, the strong competition in international markets and the execution risks related to its initial venture into marginal oilfield development. The ratings are primarily driven by the consolidated credit profile of SapuraCrest in that the issuer’s repayment capacity is derived from the financial resources of the group.

The ratings are unaffected by the proposed merger of SapuraCrest with Kencana Petroleum Berhad (Kencana) under which the assets and liabilities of both entities will be combined under a listed merged company, SapuraKencana Petroleum Berhad (SapuraKencana). The merger primarily aims to create a broad-based, well-integrated oil and gas services provider with strong delivery capabilities across the value chain, by leveraging the complementary capabilities of both entities. As one of the country's biggest oil and gas (O&G) service provider, the merged entity would be better placed to compete internationally by offering full-fledged engineering, procurement, construction, installation and commissioning (EPCIC) services, especially for more complex marginal and deepwater exploration and development activities.

While MARC believes the merger will likely produce competitive gains as well as cost synergies, a more visible impact on post-merger credit metrics of the combined entity vis-á-vis its pro forma pre–merger financial metrics is likely to be seen only over the medium and long term. MARC is mindful that SapuraKencana’s business risk profile would evolve beyond the immediate post-merger period in which business integration concerns are likely to dominate. Integration risks should be limited on account of management’s expectation of no attrition and/or rationalisation of staff and the modest overlap in the operations of both entities. Separately, MARC expects the group’s post-merger integration strategy of growing its international business to give rise to additional exposure to currency and country risks.

MARC’s initial assessment of the effect of the merger on SapuraCrest’s financial profile indicates that the more immediate impact of the merger would be an increase in the financial risk profile of the merged entity relative to that of SapuraCrest, balanced against the increased scale and breadth of its business, and improved competitive standing. Selected key financial metrics of the combined entity’s pro forma financial statements, which are based on SapuraCrest and Kencana’s latest audited accounts, are as follows: operating profit margin (OPM) of 13.8%, operating profit before interest and tax (OPBIT) interest coverage of 10.6 times (x), cash flow from operations (CFO)-to-total debt of 0.15x and total debt-to-equity (DE) of 0.75x. These compared with SapuraCrest’s equivalent metrics for the same period: OPM of 11.0%, OPBIT interest coverage of 9.2x, CFO-to-total debt of 0.44x and total DE of 0.57x, indicates that the combined entity’s pro forma debt servicing metrics are somewhat weaker while its profitability and OPBIT interest coverage metrics have strengthened slightly. MARC also notes that the merger entails the payment of approximately 15.6% of the total merger consideration in cash to the shareholders of both companies which will be financed through borrowings of approximately RM2.0 billion by SapuraKencana. With additional borrowings of RM310.0 million for the purchase of Clough’s marine construction business, the pro forma gearing of SapuraKencana would increase to 0.81x.

For the nine months ended October 31, 2011 (9MFY2012), SapuraCrest posted a pre-tax profit of RM397.2 million on revenue of RM1,996.0 million. Its operating profit margin almost doubled to 19.1%, mainly due to stronger performance of its IPF division and the turnaround in its marine services division, resulting in SapuraCrest recording a profit of RM26.0 million compared to a loss of RM51.8 million in the previous corresponding period. Cash flow from operations increased to RM250.6 million (9MFY2011: RM207.5 million) and gearing as measured by the group’s debt-to-equity ratio improved to 0.49x. Cash and bank balances as at end-9MFY2012 at RM646.4 million, suggest that Bayu Padu should be in a position to meet its scheduled debt maturities of RM125.0 million due in 2012 while noting that the cash within the group continues to be largely retained at its operating entities.

Should the proposed merger be successfully completed, the current ratings can accommodate somewhat weaker interim cash flow protection measures on the part of the combined entity in light of the perceived longer-term benefits of the merger. However, should the merged entity’s credit metrics be significantly weaker than expected, MARC will revisit the outlook and/or the ratings.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.