Thursday, September 1, 2011

S&P lowers MISC credit outlook to negative

KUALA LUMPUR: Standard & Poor's Ratings Services expects MISC BHD []'s credit protection measures to largely remain at their weak June 2011 levels for the next 12 months.

The ratings agency said on Sept 1, said this was due to Malaysia-based energy shipping company's high debt and the downturn in the cyclical shipping industry.

"The company's leverage has increased in the past few years because it expanded and renewed its fleet," said S&P credit analyst Manuel Guerena.

"In addition, MISC faces prevailing weak prices in the liner, petroleum, and chemical tanker spot markets, where we believe asset valuations and cargo volumes will remain volatile."

These factors saw S&P lowering its long-term corporate credit rating on MISC 'BBB+' from 'A-'.

'The outlook is negative,' it said, adding it also lowered its issue rating on the US$700 million 6.125% senior unsecured notes due July 1, 2014, to 'BBB+' from 'A-'. The notes are issued by MISC Capital (L) Ltd. and fully guaranteed by MISC.

S&P said it assessed MISC's stand-alone credit profile at 'bb+'.'' However, the rating was bolstered because of the company's importance to Petroliam Nasional Bhd, which owns 62.7% of MISC. (Petronas; foreign currency A-/Stable/--; local currency A/Stable/--; axAA+/--).

Guerena said this importance has grown beyond MISC's historical role as Petronas' sole liquefied natural gas (LNG) transporter.

As for the rating on MISC, the ratings agency said it reflected (1) the company's growing importance for Petronas, from whom it gets recurring cash flows from long-term charter contracts at its LNG business; (2) contracted revenues from the heavy engineering projects; and (3) and its strengthening position in the offshore and terminals businesses.

However, S&P cautioned the inherent risks of the shipping industry, which was volatile and capital'' intensive, plus existing global overcapacity and MISC's leverage, tempered these strengths.

'The negative outlook reflects our opinion that the severe downturn in the shipping industry (particularly the container segment) could cause MISC's credit protection metrics to deteriorate further.

'The outlook also factors in some uncertainty surrounding the company's capital expenditure plan, which includes a significant expansion in its petroleum tanker fleet, a segment that'' is more volatile than the stable LNG business,' it said.

S&P said it could revise the outlook to stable if MISC reduced its debt or losses at the company's liner operations were lower than it expect, such that the ratio of net operating lease-adjusted (OLA) debt to EBITDA improved to less than 5.0 times within the next year on a sustainable basis.

The ratings agency said by netting the OLA debt with cash in excess of RM1.5 billion, which was a comfortable minimum operating cash reserve MISC needed for its operations.

However, S&P also cautioned that it could lower the rating if: (1) Petronas' ownership in MISC declined or business from the parent declined significantly; (2) the ratio of net OLA debt to EBITDA did not decrease below 5.0 times over the next four quarters, which we believe might happen especially if the liner operation deteriorated further or MISC's capital expenditure further increased its indebtedness.

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