MARC DOWNGRADES OFFSHOREWORKS CAPITAL’S DEBT RATINGS, MAINTAINS ITS RATINGS AT MARCWATCH NEGATIVE

Jun 14, 2011 -

MARC has downgraded its long-term and short-term Sukuk ratings on Offshoreworks Capital Sdn Bhd (OWC) to BBIS and MARC-4IS, from A+IS and MARC-2IS respectively. The Sukuk ratings remain on MARCWatch Negative where they were initially placed on March 15, 2011 on the basis of an expected covenant breach. The rating actions affect RM200.0 million of outstanding Sukuk Musyarakah and RM150.0 million of outstanding Musyarakah Commercial Paper/Medium Term Notes (MCP/MMTN). OWC is a funding vehicle of oilfield services provider Offshoreworks Holdings Sdn Bhd (OHSB). The OHSB group participates in the underwater diving, geosurveying, construction and engineering, and ship management and chartering segments of the oilfield services sector.

The multiple-notch downgrades reflect severe unaudited losses of RM267.0 million for the 12 months ended December 31, 2010 (FY2010) at OHSB. The full year losses were more than twice of OHSB's pre-tax losses of RM119.5 million for the 11 months to November 30, 2010 after additional charged-out expenses totaling RM218.3 million for non-recoverable cost of idle vessels and equipment (RM136.6 million) and write-down of amounts due from work-in-progress (RM81.7 million). As 75% of the provisions were made in the final quarter of FY2010, the full year losses were significantly worse than MARC's expectations. OHSB's accounting practice of recognising revenue based on costs incurred prior to acceptance by the customer has masked weaknesses in its operating performance and the material adverse change in its credit profile in the last two financial years.

The loss last year resulted in retained losses of RM175.1 million and negative shareholders' funds of RM56.8 million as of end December 2010 compared to a retained profit of RM92.9 million a year earlier. As a result, OHSB is currently in breach of the Sukuk’s gearing covenant; on a pro-forma basis, it requires a RM214.2 million equity infusion to restore its debt to equity ratio to its covenant level of 2.5 times based on its end-December 2010 unaudited financial statements.

Notwithstanding the group's outstanding order book of RM1.45 billion as at December 2010, MARC believes that the group faces significant challenges as a going concern after the huge losses, particularly in light of its depleted capital and strained liquidity. Its cash balances excluding fixed deposits had fallen sharply to a modest RM5.2 million from RM70.8 million in the intervening three month period between September 30, 2010 and December 31, 2010. MARC understands that the group has commenced disposal of some of its non-core operating assets, seeking new investors and is also renegotiating operating lease payment schedules for some of its vessels. Additionally, OWC is seeking temporary waiver of its financial covenant breach, sukukholders' approval to defer its sinking fund build up payments up to August 2011 and release of some moneys currently in the sinking fund for its immediate working capital purposes.

The continuing MARCWatch placement reflects OHSB's increased susceptibility to adverse circumstances leading to default. Failure to develop a credible turnaround plan and to obtain the support of its sukukholders to restructure its rated obligations will most likely place OWC at risk of an acceleration of the rated obligations and immediate demand for repayment. Additionally, MARC is concerned that an audit of OHSB's FY2010 financial statements could lead to a further increase in reported losses. MARC will monitor developments at OHSB and OWC to resolve the MARCWatch placement.

Contacts:
Eric Chua, +603-2082 2245/ cheekiong@marc.com.my;
Gary Lim Chun Pin, +603-2082 2243/ cplim@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.