MARC has affirmed the rating of AA-ID on Bayu Padu Sdn Bhd’s (Bayu Padu) RM500 million Istisna’ Serial Bonds (Istisna' Serial Bonds) with a stable outlook.

Dec 27, 2013 -
MARC has affirmed the rating of AA-ID on Bayu Padu Sdn Bhd’s (Bayu Padu) RM500 million Istisna’ Serial Bonds (Istisna' Serial Bonds) with a stable outlook. The rating action affects RM130 million of outstanding Istisna' Serial Bonds.
Bayu Padu is a special purpose funding entity of SapuraKencana Petroleum Berhad (SapuraKencana). SapuraKencana is one of the world’s largest integrated oil and gas (O&G) services and solutions providers with a presence in several regions including Asia, Australasia, Middle East, Europe, the Americas and Africa. Its operations encompass engineering, procurement, construction, installation and commissioning (EPCIC), drilling, marine services, development and production of oilfields, and geotech and maintenance services.
The affirmed rating and stable outlook are based on available funding sources for the repayment of Istisna' Serial Bonds as confirmed by the facility agent, which substantially mitigates bondholder exposure to the increased risks associated with SapuraKencana's significant acquisitive activity in recent periods. The group is expected to incur significant additional debt in 2014 as a result of a pending acquisition, delaying improvement in its financial leverage beyond the initially envisaged time frame. At the same time, MARC notes that the industry fundamentals for the oil and gas (O&G) and oilfield services sectors have continued to remain supportive of SapuraKencana's credit quality and should continue to help drive cash flow growth.
SapuraKencana completed its US$2.9 billion acquisition of Seadrill Ltd's (Seadrill) tender rig business in April 2013 and more recently, announced that it would acquire the entire issued equity of Newfield Malaysia Holding Inc (Newfield) for US$897 million. The Newfield acquisition will take SapuraKencana into a new area, upstream oil and gas operations as Newfield presently holds participating interests in nine production sharing contract (PSC) blocks in Malaysia.
SapuraKencana's leverage is currently high for a 'AA-' rating while its operating cash flow (CFO) to interest and debt ratios have dropped to 3.9 times (x) and 0.09x respectively for the financial year ended January 31, 2013 (FY2013), down from 10.8x and 0.19x one year ago. MARC observes that the group's CFO interest coverage improved to 4.7x for the nine months to October 31, 2013.
MARC views the future supportability of the significant goodwill on SapuraKencana's balance sheet as fundamental to the group's ability to maintain its debt-to-equity ratios below 2.0x. As end-October 2013, SapuraKencana's goodwill on consolidation stood at RM6.8 billion compared to its total equity of RM9.8 billion. Should the Newfield acquisition proceed, SapuraKencana's pro forma leverage is set to increase further with the additional US$700 million debt it intends to take on to fund the acquisition.
Partly offsetting the risk of potential deterioration in SapuraKencana's coverage ratios is the predictable production profile of Newfield's proved reserves, and associated cash flow generating potential. MARC believes that the additional debt that the company proposes to take for the acquisition of Newfield will very likely be adequately serviced by cash distributions from the O&G upstream operations should the holding company be successful in staggering acquisition debt maturities. That said, the rating agency is mindful that the group's increased leverage will reduce its overall resilience to O&G price volatility.
MARC expects SapuraKencana's cash position to head lower in the coming months as the balance of the purchase consideration of US$198 million for the Newfield acquisition is expected to be funded with internally generated funds.  As of October 31, 2013, SapuraKencana's cash and cash equivalents stood at RM1.3 billion, which MARC considers to be somewhat low relative to its short-term borrowings of RM8.3 billion. Nevertheless, SapuraKencana's continued favourable access to external funding sources has afforded the group strong financial flexibility to fund its acquisitions and mitigate liquidity risk.
MARC will withdraw its rating on the Istisna' Serial Bonds upon completion of the early redemption of all outstanding bonds expected in early January 2014.
Contacts:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my.