MARC DOWNGRADES DEBT RATING ON SCOMI GROUP BERHAD TO BBB+ AND MAINTAINS RATING ON MARCWATCH NEGATIVE

Jun 20, 2012 -

MARC has downgraded its rating on Scomi Group Berhad's RM500 million Medium Term Notes programme to BBB+ from A. The rating continues to be maintained on MARCWatch Negative. The rating action affects RM200 million of outstanding notes.

The downgrade in Scomi's rating reflects noteholders' rising susceptibility to event risk as a result of a delay encountered in the completion of its announced divestments of equity in subsidiaries, Scomi Nigeria Pte Ltd (SNPL) and Oiltools Africa Ltd (OAL). The delay in its asset disposal programme has impacted the timeline for Scomi's proposed partial refinancing of the outstanding notes given that the refinancing transaction is conditioned upon the completion of its asset disposal plan. MARC is of the view that the compressed timeframe to complete the asset sales and proposed refinancing transaction significantly increases the risk that the repayment of notes will not be made on a timely basis. The outstanding notes mature on September 28, 2012, and liquidity and refinancing risks will increase as the date approaches.

The rating downgrade also takes into account the continuing pressure on Scomi's operating performance and its insufficient cash flow generation. As such, MARC believes that the risk profile of the rated notes is no longer consistent with an 'A' rating level.

The group managed to post an unaudited pre-tax profit of RM22.9 million in the first quarter of 2012 (1Q2012) compared with full-year pre-tax losses of RM225.3 million and RM174.8 million in 2011 and 2010 respectively. Its operational cash flow, however, was negative RM11.9 million for 1Q2012. Scomi's consolidated debt-to-equity ratio, meanwhile, rose further to 1.95 times as at end-March 2012. 

Scomi is dependent on asset sales, capital repayment from 43%-owned Scomi Marine Berhad (SMB) and refinancing to repay the outstanding notes. While Scomi has encountered delay in planned asset sales, the group's internal restructuring was completed in April this year as per schedule. SMB will be making a capital repayment to its shareholders following the disposal of several marine logistic subsidiaries to another group entity. Scomi expects to receive a capital repayment of RM58.0 million from SMB.

The proceeds from Scomi's announced equity divestments of its entire equity interest in SNPL and a 2% equity interest in OAL to Nigerian-based oil service company AOS Orwell Ltd are now likely to be received by middle to end of August this year, two months from its original June target date. The delay is due to the several conditions precedent to the acquisition that has been imposed by the buyer; MARC understands from Scomi that efforts are being made to fulfill them. Scomi's refinancing target date has also been pushed back for two months. MARC views the residual execution risk surrounding the aforementioned equity divestments and refinancing risk as the key risks facing Scomi.

The continued negative watch placement reflects MARC's view that further downward rating pressure could develop in the event that the revised target completion dates for the aforementioned equity divestments and RM85.0 million refinancing are missed.

Contacts:

Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;

Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.