MARC AFFIRMS ITS AAAIS(fg) RATING ON SENARI SYNERGY’S RM380.0 MILLION ISLAMIC MEDIUM TERM NOTES PROGRAMME

Oct 22, 2013 -

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 is underpinned by 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 robust capital base, ample liquidity and its status as a government-sponsored financial guarantee insurer.

Senari Synergy is an investment holding company with seven subsidiaries and one associate company involved in the operation of oil terminals, port facilities and palm oil refineries, and property development at 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. Demand risk of the oil terminal is wholly mitigated by 30-year user agreements with two very strong credit entities, PETRONAS Dagangan Bhd (PDB) and Shell Timur Sdn Bhd (STSB). PDB and STSB are also the offtakers for the CODT which commenced commercial operations on February 3, 2012.

Senari Synergy’s pre-tax profit rose to RM6.1 million (2011: RM2.2 million) on the back of higher revenue of RM74.1 million (2011: RM46.7 million) in 2012 upon recognition of revenue from the CODT. MARC notes that the group’s earnings continue to be supported by its oil terminal business as its port operation in Tanjung Manis and property development businesses have yet to contribute meaningfully to the group’s performance since rating agency’s last review. Although Senari Synergy has been recording stable cash flow from IOT, a portion of its recognised tariff revenues from the CODT has yet to be received pending finalisation of CODT’s tariffs. Protracted negotiations between Senari Synergy and the two offtakers over the CODT tariffs have caused CODT’s trade receivables to increase to RM23.2 million as at June 30, 2013. The group had collected RM13.5 million out of its CODT’s 2012 receivables amounting to RM24.4 million. While Senari Synergy has indicated that the CODT tariffs are expected to be finalised by end-2013, any further delay in the finalisation of tariffs would weigh on the group’s liquidity position and its compliance with its finance service cover ratio (FSCR) covenant.

Senari Synergy’s free cash flow (FCF) in 2012 turned positive to RM27.2 million from negative RM86.2 million in 2011 on account of lower capital spending. However, FCF interest coverage remained modest at 1.13 times in 2012 (2011: -7.08 times). Following its protracted tariff negotiation process, MARC retains its concerns over Senari Synergy’s ability to address its scheduled debt amortisation in the absence of refinancing. In near-term, MARC expects that the group’s cash and cash equivalents of RM92.3 million as of June 30, 2013 should provide sufficient liquidity to meet maturing sukuk obligations. The group’s debt-to-equity ratio and FSCR remained in compliance with the programme’s covenant levels at 2.22 times and 7.79 times respectively as of December 31, 2012. There is a risk, however, that Senari Synergy liquidity buffer and covenant headroom will continue to erode if the issue of CODT tariffs is not promptly resolved.

At the company level, Senari Synergy received dividend income and intercompany repayments of RM10.3 million and RM23.7 million respectively against sukuk profit payment and financial guarantee fees amounting to RM22.6 million in 2012. Senari Synergy has also incurred additional short-term borrowings of RM15.1 million from its revolving credit facility for capital investment purposes in associate company. In view of the poor financial performance of its non-core subsidiaries, these companies are not expected to generate significant cash flow to the group; as such, Senari Synergy’s repayment ability may be affected going forward.

Notwithstanding concerns that Senari Synergy’s standalone credit profile will deteriorate further due to the still unresolved CODT tariff issues, sukukholders’ exposure to downside risk in relation to Senari Synergy’s credit profile is mitigated by the irrevocable and unconditional guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will hinge largely on changes in Danajamin’s credit strength.

Contacts:

Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;

Tan Eng Keat, +603-2082 2265/ engkeat@marc.com.my;

David Lee, +603-2082 2255/ david@marc.com.my.