MARC AFFIRMS RATING OF A+IS(CG) TO KMCOB CAPITAL BERHAD’S RM343.1 MILLION SUKUK MURABAHAH MEDIUM TERM NOTES PROGRAMME; REVISES OUTLOOK TO NEGATIVE

Oct 8, 2012 -

MARC has affirmed its rating on KMCOB Capital Bhd's (KMCOB) RM343.1 million Sukuk Murabahah Medium Term Notes Programme of A+IS(CG) and revised its rating outlook to negative from stable.

KMCOB is the funding vehicle of the Scomi Oilfield Limited (SOL) group. The sukuk benefits from corporate guarantee from Scomi Oiltools Bermuda Limited (Scomi Oiltools), the present immediate holding company of Scomi's oilfield services subsidiaries and a 76.08%-owned direct subsidiary of Scomi Group Berhad (Scomi). Accordingly, the rating is primarily driven by SOL's consolidated credit profile.

The outlook revision reflects the delay in SOL's disposal of its West African assets, the proceeds of which were earmarked for the redemption of its 2018 sukuk tranche amounting to RM90.0 million. SOL was initially required to complete its disposal of its West African assets and deposit the proceeds into the Finance Service Reserve Account on or before December 31, 2012. While the sukukholders have granted KMCOB indulgence until December 31, 2013 to complete the divestment, a consequence of the delay will be a slower-than-expected pace of deleveraging on the part of SOL. The group's consolidated debt-to-equity ratio was high at 1.72 times (x) as at end-March 2012. Additionally, SOL's potentially increasing working capital needs in respect of new contracts could limit its ability to use internal operating cash flow to pare its debt.

The affirmed rating takes into account the announced reorganisation of intermediate holding company SOL and the proposed acquisition of the reconstituted SOL Group (New SOL Group) from Scomi by Scomi Marine Bhd (SMB). Following the completion of the proposals, expected by the fourth quarter of 2012, SOL's resulting financial profile and business prospects are expected to be stronger.

Scomi plans to separate the oilfield services businesses of the existing SOL group based on geography. Upon the completion of the proposed reorganisation, the New SOL Group will be comprised exclusively of Scomi Group's Eastern Hemisphere oilfield services operations and its West Africa drilling waste management (DWM) business. MARC believes that the aforementioned reorganisation should benefit the risk profile of SOL, and insulate it from the weaker operating performance of its Western Hemisphere oilfield services business.

As disclosed by Scomi in its announcement on its proposed disposal of its equity holdings in SOL, the adjusted audited profit after tax and minority interest (PATAMI) and earnings before interest, tax, depreciation and amortisation (EBITDA) of the New SOL Group for the financial year ended December 31, 2011 (FY2011) were RM32.9 million and RM101.9 million after the exclusion of non-recurring items. SOL reported an operating profit of US$15.0 million and a pre-tax profit of US$1.4 million in FY2011. MARC notes the group maintained compliance with financial covenants under its sukuk issuance; its consolidated net debt-to-equity ratio stood at 1.07x for FY2011 (FY2010: 1.14x), within the group net debt-to-equity covenant ceiling of 1.25x.

As of end-FY2011, the SOL Group had total borrowings of US$156.9 million, of which close to 70% (represented by outstanding sukuk) is located at KMCOB’s level. Subsequent to the restructuring, KMCOB's debt servicing capacity will continue to be supported by the cash flow from SOL's Eastern Hemisphere operations which currently accounts for the majority of SOL's consolidated operating profits. SOL's recent financial performance and business outlook for its major markets of Malaysia, Indonesia, Thailand and Middle East suggest that the positive momentum with respect to earnings and operating cash flow generation should continue. At the same time, MARC also sees lingering extension risk with respect to the planned early redemption of KMCOB's 2018 sukuk tranche notwithstanding the new timeline of December 31, 2013 for the completion of the West African asset disposals. The extension will allow completion of the reverse takeover of the New SOL Group by SMB within the expected timeframe without jeopardising the prospect of realising higher proceeds on the disposal of the assets.

On Scomi's disposal of SOL to SMB, MARC believes that the planned divestment will help reduce event risk at the Scomi company level stemming from a put option given to the minority shareholder of SOL, Standard Chartered Private Equity Limited (SCPE), and associated 'contagion' risk across the entire Scomi family. A substantial cash outlay would be required from Scomi in the event the aforementioned put option is exercised, subjecting the ultimate parent to increased liquidity risk and KMCOB to a potential exercise of the right to accelerate the sukuk.

MARC opines that the successful completion of the disposal will help lower credit risk correlations between Scomi and the New SOL Group. MARC assesses the credit risk profile of the existing SOL Group as lower than that of Scomi, and accordingly, the current rating does not benefit from any uplift from the ultimate parent. Following the completion of the disposal transaction, Scomi Oiltools’ corporate guarantee will be replaced by a new guarantee from the reconstituted SOL. The new principal subsidiaries of the New SOL Group will also act as guarantors for the sukuk.

The rating may be lowered if SOL's reorganisation and/or its acquisition by SMB are substantially delayed or fails to proceed, or there is an increased likelihood that SOL will not complete its disposal of its West African assets by December 31, 2013. Other factors, including weaker-than-anticipated consolidated cash generation and operating profit, would also be factored into any rating decision.

Contacts:

Milly Leong, +603-2082 2288/ milly@marc.com.my;

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

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