MARC has affirmed its AAAIS(fg) rating on Senari Synergy Sdn Bhd's (Senari Synergy) RM380 million Islamic Medium Term Notes (IMTN) Programme.

MARC has affirmed its AAAIS(fg) rating on Senari Synergy Sdn Bhd's (Senari Synergy) RM380 million Islamic Medium Term Notes (IMTN) Programme. The outlook on the rating is stable. The affirmed rating and outlook reflect an unconditional and irrevocable guarantee provided by Danajamin Nasional Berhad (Danajamin) on the sukuk obligations. MARC's current AAA/stable rating for Danajamin is based on its strong capital base, ample liquidity and its status as a government-sponsored financial guarantee insurer.

Senari Synergy is an investment holding company with eight operating subsidiaries involved in the operation of oil terminals, port facilities and palm oil refineries, and property development. Senari Synergy's operations are concentrated in two complexes, Assar Senari Industrial Complex I (ASIC I) in Kuching, Sarawak, and Assar Senari Industrial Complex II (ASIC II) in Tanjung Manis, Sarawak. Senari Synergy's core assets, the independent oil terminal (IOT) located in ASIC I and centralised oil distribution terminal (CODT) located in ASIC II, are expected to generate the bulk of the group's operational cash flow to service its borrowings.

Since the assignment of Senari Synergy's initial rating, the group posted weaker-than-expected operating results and negative cash flow from operations (CFO). At holding company level, CFO adjusted for one-off effects of an increase in amounts owed to subsidiaries was negative RM3.0 million in 2011. Also exerting pressure on Senari Synergy's credit profile is the delayed finalisation of tariff revenue for its CODT in Tanjung Manis and an increased uncertainty as to its ability to match future cash flows to its projected debt amortisation profile. Although the two offtakers of the oil terminals are very strong credit entities and the parties have entered into 30-year user agreements which wholly mitigate demand risk, Petronas Dagangan Berhad and Shell Timur Sdn Bhd has not made any tariff payments despite the CODT commencing operations on February 3, 2012. As such, tariff revenue from the CODT operations has not been recognised and further delays in determining the tariffs will increase liquidity constraints and financial risks.

The group posted below-projected revenue of RM45.5 million in 2011 (2010: RM12.3 million), of which 74.5% was solely contributed by the IOT. Senari Synergy recorded net operating cash flow (NOCF) of negative RM44.1 million in 2011 (2010: negative RM37.9 million). Excluding one-off capital expenditure of RM42.8 million which was reflected in Senari Synergy's working capital and the interest expenses and dividend paid amounting to RM15.2 million, the company's adjusted NOCF would be approximately RM13.9 million. The group's NOCF is lower than the forecast average of RM34.2 million per annnum required to meet its project debt repayment schedule, largely on account of the delays in the commercial operation and the finalisation of tariff revenue for the CODT. Nonetheless, Senari Synergy remained in compliance with the programme's financial covenants, evidenced by its finance service coverage ratio (FSCR) of 1.73 times including cash balances and debt-to-equity ratio of 71:29 as of December 31, 2011.

Senari Synergy's ability to halt further deterioration in its standalone credit profile will be largely driven by the group's ability to generate stable cash flows from the IOT and CODT while stemming the cash losses of its other business divisions. Noteholders under the IMTN programme are insulated from any downside risk in relation to Senari Synergy's credit profile by the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook would be primarily driven by changes in Danajamin's credit strength and/or Danajamin's withdrawal of support for Senari Synergy's debt obligations.

Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my; Jason Kok, +603-2082 2258/ jason@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

October 22, 2012