Tuesday, September 20, 2011

Moodys cuts MISC ratings from A3 to Baa1

KUALA LUMPUR: Moody's Investors Service downgraded the issuer and senior unsecured ratings of MISC BHD [] from A3 to Baa1. The outlook of the ratings is negative.

It said on Tuesday, Sept 20 the rating action concluded the review for downgrade initiated on June 27.

'The prolonged weakness in MISC's credit metrics, operating losses in its liner, chemical and petroleum segments, and large capital expenditure plans -- amidst a difficult operating environment ' had triggered the review,' it said.

Moody's said the downgrade involved changing MISC's standalone rating to Ba1 from Baa3, while maintaining a three-notch uplift based on strong parental support from Petroliam Nasional Bhd (A1/Stable).

"The downgrade of the standalone rating reflects the deterioration in MISC's credit metrics over the last two financial years, and its limited ability to deleverage due to its high committed capex plans in FY2011 and FY2012," said Moody's vice president and senior analyst Simon Wong.

"Furthermore, the petroleum, chemical and liner segments are not expected to break even in the near term due to the challenging nature of the operating environment.

'MISC's strategy to minimize losses and volatility -- through growing the contracted versus spot revenue mix for its petroleum and chemical segments, and the rationalisation of its poor-performing liner trade routes -- is unlikely to be sufficient to offset the negative dynamics of the market."

MISC's adjusted debt/earnings before interest, tax, depreciation and amortization (EBITDA) of 6.0 times and EBIT/interest of 1.6 times for FY ended March 31, 2011 remain stretched for its current standalone rating.

The company is also projected to incur US$1.8 billion of capex -- from FY2011 to FY2012 -- for new vessel deliveries, offshore and heavy engineering projects. In addition, its liquidity profile has weakened, with maturing debt of RM1.58 billion requiring refinancing as at June 30, 2011.

Moody's expected MISC's adjusted debt/EBIDTA to remain above 6.0 times for the nine-month period ending Dec 31, 2011, and which currently remained outside Moody's expectation of less than 5.5 times, a level more commensurate with MISC's present rating.

MISC's standalone rating of Ba1 reflects (a) its ability to secure employment of vessels through aligning its business development with that of its parent, Petronas; (b) the diversified nature of its fleet and leading market position in liquefied natural gas (LNG) transportation and chartering of offshore floating solutions which provides it with stable income; (c) the fact that about half of its revenue is derived from term contracts which protects it against cyclical freight rates; and (d) its good management track record.

Moody's said it continues to recognise the strong linkage with and support from MISC's parent, Petronas, which is reflected in the 3-notch parental uplift to final Baa1 rating from Ba1.

This uplift is supported by the 62.7% level ownership held by Petronas, strong management oversight, and operational linkages between MISC and Petronas, and an increasing tangible level of extraordinary financial support from Petronas.

These include the injection of the LNG fleet in 1998, which currently contributes to over 100% of MISC's profit before tax, extending a shareholder's loan in 2009, undertaking to subscribe any unsubscribed rights issue in 2010, as well as subscribing to MISC's issuance out of its MTN programmes.

'The negative outlook reflects Moody's concern that the company's high level of debt-funded capex as well as the challenging nature of its operating environment could further pressure MISC's standalone credit profile.

'The outlook may return to stable, if the company is able to prudently manage debt-funded capex, such that adjusted Debt/EBITDA falls back below 5.5 times over the near term, and EBIT interest rises above 2.0 times on a sustainable basis. At the same time, MISC will take actions to comply with the financial covenants,' it said.

Moody's said upward rating pressure was unlikely, given the challenging conditions in the shipping market and the losses in MISC's petroleum, chemical and liner segments.

Downward rating pressures could emerge:

(a) if MISC's financial profile fails to improve from its current levels, or further deteriorates due to ongoing pressure on its profit margins, in turn due to protracted weak shipping market conditions,

(b) if debt-funded capital outlays are higher than currently committed, such that its credit metrics weaken, as evidenced by persistent negative free cash flow; Debt/EBITDA consistently above 5.5x; or EBIT interest coverage consistently below 1.5 times to 2.0 times in the medium term;

or (c) in the unlikely event that there are changes in the relationship between Petronas and MISC that weaken support for MISC.

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