MARC has issued this rating update as part of its ongoing surveillance process on its A+IS(cg) rating/Negative outlook on KMCOB Capital Berhad’s (KMCOB) Sukuk Murabahah Medium Term Notes programme (Sukuk Murabahah).

Oct 29, 2013 -
MARC has issued this rating update as part of its ongoing surveillance process on its A+IS(cg) rating/Negative outlook on KMCOB Capital Berhad’s (KMCOB) Sukuk Murabahah Medium Term Notes programme (Sukuk Murabahah). Since MARC’s last rating action on KMCOB’s Sukuk Murabahah on April 9, 2013, the company has proposed to issue guaranteed serial bonds of up to RM320 million, to which the rating agency recently assigned a preliminary rating of AAA(fg). The proceeds of the issuance will be used to fund the full redemption of the outstanding Sukuk Murabahah by December 13, 2013, greatly reducing the risk of a liquidity event to the credit. Earlier, a nine-month waiver was sought by KMCOB from sukukholders for compliance with its annual debt service cover ratio due to liquidity pressures at parent Scomi Oilfield Limited (SOL). KMCOB is the funding vehicle for SOL which has extended a corporate guarantee on the programme.
Sukukholders had approved the refinancing and early redemption of all the outstanding Sukuk Murabahah on June 28, 2013 on the condition that the refinancing exercise must be completed by December 13, 2013, which is also the due date for the redemption of about RM45 million for two sukuk series.
SOL is an investment holding company with subsidiaries mainly involved in the provision of drilling fluids and drilling waste management services. Post-restructuring, SOL’s financial performance improved with the disposal of its loss-making Western Hemisphere business. It posted operating profit of US$32.7 million for the 15-month financial period ended March 31, 2013 (FP2013), excluding non-recurring gain of about US$10 million. This translated to a higher operating profit margin of 9.55% in FP2013 compared to 4.67% in 2011 prior to the restructuring (before restatement). Its gearing, as measured by its debt-to-equity ratio, has been brought down to a more manageable 0.89x as at end-March 2013. SOL’s liquidity position has also improved somewhat since securing working capital credit lines amounting to US$28 million in the first three months of 2013. As at end-March 2013, cash and bank balances stood at US$13.8 million. SOL’s improved liquidity position has supported the build-up of funds in KMCOB’s finance service reserve account (FSRA) to RM39.8 million as at September 17, 2013, the equivalent of four months of debt service requirements.
The negative outlook on the rating reflects SOL’s business profile and key financial metrics which remain weak for KMCOB’s A+IS(cg) programme rating despite its progress in reducing leverage and improving its earnings. Downward rating pressure could emerge if the refinancing exercise is not completed by December 13, 2013. MARC will monitor the programme rating until the completion of the refinancing exercise, subsequent to which the rating will be withdrawn.
Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.