MARC REMOVES KMCOB CAPITAL BERHAD’S SUKUK RATING FROM MARCWATCH NEGATIVE; AFFIRMS A+IS(cg) RATING WITH NEGATIVE OUTLOOK

Apr 9, 2013 -

MARC has removed its rating on KMCOB Capital Bhd’s (KMCOB) RM343.1 million Sukuk Murabahah Medium Term Notes (MTN) programme from MARCWatch Negative and affirmed  its A+IS(cg) rating on the company. The outlook on the rating is negative.

KMCOB is the funding vehicle of Scomi Oilfield Limited (SOL), the oilfield services unit of Scomi Group Bhd (Scomi). MARC had earlier placed KMCOB’s sukuk rating on MARCWatch Negative on rising risks associated with Scomi’s delayed internal restructuring of its oilfield services business and SOL’s tight liquidity.

The current rating action, which affects RM302.55 million of outstanding notes, follows the completion of Scomi’s corporate exercise and takes into account SOL Group’s success in obtaining new bank borrowings to fund its working capital needs. The rating of KMCOB’s sukuk continues to be driven primarily by the creditworthiness of its parent company, SOL which has extended a corporate guarantee for the sukuk. 

Prior to the restructuring, losses from the Western Hemisphere oilfield services business had been a drag on the performance of SOL and its credit profile. The recently completed internal restructuring exercise entailed the transfer of SOL’s loss making Western Hemisphere oilfield services business out of SOL Group across to Scomi Oiltools Bermuda Limited (SOBL); the regrouping of Scomi’s Eastern Hemisphere oilfield services business under SOL; and Scomi’s disposal of SOL to Scomi Energy Services Bhd, (formerly known as Scomi Marine Limited) (Scomi Energy Services). Post-completion of the aforementioned corporate exercise, SOL now operates as a subsidiary of Scomi Energy Services.

MARC expects the restructuring to benefit SOL’s margins and pave the way towards improved credit metrics as well as greater financial flexibility at both SOL and Scomi Energy. The rating agency notes a trend toward generating increased EBITDA in 2013, supported by satisfactory order book replenishment. SOL’s order book, which includes a recently secured USD700 million project awarded by national oil company Petroliam Nasional Berhad, currently stands at approximately USD1.5 billion.

Subsequent to the rating agency’s negative MARCWatch placement in January 2013, SOL has secured USD 28.35 million in the form of working capital credit lines from two banks to fund its working capital requirements. This development somewhat alleviates MARC’s concern over SOL’s ability to fund its new projects and improve its liquidity position. Management believes that its present credit facilities together with the additional financing to be procured will be sufficient to fund SOL’s working capital needs for 2013. The group is expected to obtain additional financing in the near future to support its pipeline of orders.

The negative outlook, meanwhile, reflects expectation that the SOL’s financial measures, particularly its cash flow protection measures, will remain weak for its current rating level. KMCOB has little liquidity cushion and has obtained a waiver of compliance with its annual debt service cover ratio (ADSCR) for the period from October 1, 2012 through June 30, 2013.  The delay in SOL’s disposal of its West African assets has also affected its deleveraging timeline.

The rating could come under pressure if SOL’s credit metrics fail to strengthen as expected. The outlook could revert to stable if SOL’s core earnings, cash generation and liquidity show meaningful and sustainable improvement over the coming quarters.

Contacts:

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

Yap Yaw Tsong, +603-2082 2278/ yawtsong@marc.com.my.