MARC REVISES OUTLOOK TO NEGATIVE ON MISC BERHAD’S ISLAMIC DEBT PROGRAMMES; AFFIRMS RATINGS

Apr 3, 2012 -
MARC has affirmed its ratings on MISC Berhad's (MISC) RM2.5 billion Islamic Medium Term Notes (IMTN) and RM1.0 billion Murabahah Commercial Papers/Medium Term Notes (MCP/MTN) Programmes at AAAID and MARC-1ID /AAAID respectively and revised the outlook to negative from stable. The rating action affects RM2.25 billion of outstanding notes under the rated programmes.

The outlook revision follows the company’s recent release of its unaudited results for the last nine months of 2011, which indicated earnings pressure, declining interest coverage, increased debt leverage and persistent negative free cash flow. The shipping company posted a sharply reduced operating profit of RM599.4 million and a pre-tax loss of RM1.2 billion for the nine month period after accounting for impairment and provision on exit of liner business operations. MARC does not expect significant improvement in the operating environment of MISC’s chemical and petroleum shipping segments over the next 12 to 18 months which, in combination with its heavy capital spending, could delay improvement in its financial performance and credit measures.

The affirmed ratings continue to incorporate support-driven uplift associated with high parental support expectations in view of MISC’s moderately high operational integration with its parent and past demonstrated financial support from Petroliam Nasional Berhad (Petronas). MARC views MISC as a captive provider of LNG shipping services and offshore floating solutions to the national oil company, and believes that a high level of financial support will continue to be available to the shipping company. Hence, MARC views the high expected parental support from Petronas (rated AAA/Stable on the basis of public information) as an important offset to the recent erosion in MISC’s standalone credit protection metrics. The affirmed ratings also incorporate the predictable and stable earnings and cash flow generation capacity of MISC’s LNG and offshore segments, which in aggregate contributed nearly 30% of group revenue and RM1.3 billion in pre-tax profits for the last nine months of 2011.

MISC is an integrated maritime, offshore floating solutions, heavy engineering and logistic services provider, and is listed among the top five largest shipping conglomerates in the world by market capitalisation. Its business activities are energy-related shipping (LNG, petroleum and chemical), other energy related business (offshore, heavy engineering and tank terminal) and integrated liner logistics. As at December 31, 2011, the group operates a fleet of 169 vessels and 12 offshore floating facilities, of which nearly 70% of the vessels are owned by the group.
Overcapacity and weak industry conditions in the global shipping industry have led to MISC's liner, chemical and petroleum shipping segments recording cumulative pre-tax losses of RM3.8 billion over the last five quarters ending December 31, 2011. On November 24, 2011, MISC announced that it would exit from the container shipping business by shutting down its operations and disposing the vessels. MISC made a one off provision amounting to RM1.4 billion in relation to its planned exit from the liner business, which had contributed significantly to its nine month pre-tax loss of RM1.2 billion. MARC views the move as positive for MISC's business and financial risk profile in light of the losses incurred by the business in the last three financial years and the weak prospects for recovery in the liner market in the near term. The exit from the liner business will also align MISC's business profile more closely to that of its parent company. The exercise is expected to be completed by end-June 2012.

MISC's free cash flow (FCF) has been consistently negative. MARC believes that the company’s significant committed capital expenditure of RM3.2 billion will keep FCF negative in 2012. Its capital spending needs and fairly high short-term debt of RM5.9 billion against cash balance of RM4.2 billion as at December 31, 2011, suggest that the shipping company would need to reassess its liquidity management policies to augment its internal cash flow generation and balance sheet liquidity gap over the next 12 to 18 months through efforts which amongst others could include extending the maturing short-term debts into long-term debts and/or asset monetisation. While MARC expects MISC’s access to funding sources to remain favourable, any substantial incremental debt would pressure the group’s leverage metrics and take its debt-to-equity ratio, beyond the current five-year high of 0.64 times (x) as at December 31, 2011.

In the last nine months of 2011, the group recorded a year-on-year decline in revenue of 9.5% to RM8.5 billion (9M2010: RM9.4 billion) and pre-tax loss of RM1.2 billion (9M2010: pre-tax profit of RM2.5 billion). The loss was mainly attributable to impairment provisions of RM293.4 million and aforementioned provisions related to the group's exit from the liner business. Excluding these provisions, the group would have reported profits, although significantly lower than that for the preceding year corresponding period. Cash flow from operations (CFO) for the nine month period was RM1.0 billion, resulting in weaker CFO interest and debt coverage ratios of 3.9x and 0.05x (12 months ended March 31, 2011: 5.4x and 0.16x respectively). Compared to the preceding year corresponding period, the rating agency noted that FCF deficit was smaller despite the lower CFO, chiefly as a result of reduced capital expenditure and dividends.

A downgrade in MISC’s long-term debt rating could occur over the next 12-18 months if further erosion of MISC’s credit metrics and financial flexibility were to occur with no near-term prospects for recovery, and/or MARC perceives a weakening of parental support. The rating outlook could revert to stable if MISC’s debt protection ratios strengthen as a result of sustainable improvements in its financial performance and operational cash flows, and/or capital infusion which MARC views as unlikely in the near-term.

Contacts:
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.