RAM Ratings downgrades Hubline's ratings from A2/P1 to BBB1/P2

Published on 08 May 2012

RAM Ratings has downgraded the respective long- and short-term ratings of Hubline Berhad’s (“Hubline” or “the Group”) RM150 million Murabahah Commercial Papers/Medium-Term Notes Programme (2005/2012) (“CP/MTN”), from A2 and P1 to BBB1 and P2. Concurrently, the A2 rating of the Group’s RM70 million Bai’ Bithaman Ajil Islamic Bonds (2005/2012) (“the IDS”) has also been downgraded to BBB1. Meanwhile, the negative outlook on the long-term ratings has been maintained.



Hubline is involved in the provision of container and dry-bulk shipping services as well as vessel chartering. The Group’s container and dry-bulk vessels ply intra-Asian and Indian sub-continental routes. Hubline operates 20 containerships, 2 handy-sized bulk carriers and 15 sets of tugs and barges.

The downgrade reflects a weakening in Hubline’s liquidity position and heightened refinancing risk as it faces sizeable debt maturing in November and December 2012, the largest of which is the outstanding RM100 million CP/MTN and IDS. We opine that this risk is exacerbated by Hubline’s persistently weak operating performance amid a very challenging business landscape.

Based on the Group’s audited financials for FYE 30 September 2011 ("FY Sep 2011") and its 1Q FY Sep 2012 results, we are of the view that Hubline’s performance is much weaker than previously thought. The Group’s unaudited results for FY Sep 2011 (on which RAM Ratings had based its previous assessment) had shown a 69.4% improvement at the operating profit before depreciation, interest and tax level, in contrast to the 8.1% year-on-year (“y-o-y”) increase subsequently revealed by the audited numbers. Hubline’s operating profit before interest and tax for 1Q FY Sep 2012 further plunged 54.2% y-o-y and 51.9% quarter-on-quarter, due to higher bunker cost and the Group’s competitive pricing strategy. Longer credit terms had also lengthened Hubline’s receivables cycle. “We foresee Hubline’s operating environment to remain difficult amid elevated bunker cost. While we note slight improvement in freight rates in recent months, albeit still at a relatively low level, the sustainability of this uptrend remains to be seen particularly as the industry faces oversupply,” observes Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

The Group's cash and bank balances stood at RM52.46 million as at end-December 2011, against RM271.28 million of short-term borrowings. We understand that Hubline plans to repay the CP/MTN and IDS using proceeds from a private placement of shares, which could raise up to RM61 million (with RM40 million subscribed for to date), and utilising its cash reserves (RM30 million of its RM58 million cash balances as at end-February had been pledged for the redemption of its CP/MTN and IDS). The management has also represented that it will embark on further fund raising efforts upon the completion of the private placement of shares by June 2012. We highlight that Hubline’s ability to repay its debts this year is highly dependent on the success of these refinancing exercises.

Meanwhile, Hubline’s credit profile remains supported by its extensive network across 18 countries as well as its focus on niche routes, which are less competitive. Due to its fleet of smaller vessels with capacities of less than 800 twenty-foot equivalent units ("TEU"), the Group is able to call at smaller ports that cannot accommodate the larger vessels of the main line operators. Hubline also enjoys some degree of diversification as it is involved in both the dry-bulk and container-shipping segments.

The negative outlook reflects our concerns regarding the Group’s weak liquidity and short-term refinancing risk. We highlight that Hubline’s ratings could face downward pressure if its business fundamentals weaken further or its financial and liquidity positions do not improve. In particular, its ratings could face a multi-notch downgrade if Hubline does not show significant progress in its equity fund-raising efforts and/or secure refinancing of its CP/MTN and IDS by end-August 2012. On the other hand, the outlook may be reverted to stable if Hubline is able to address its near-term liquidity concerns and demonstrate sustainable improvement in its business and financial profiles.

Media contact
Woon Tien Ern
(603) 7628 1040
tienern@ram.com.my