Thursday, 8 March 2012

Moody’s downgrades MISC’s ratings, outlook negative

KUALA LUMPUR (March 8): Moody's Investors Service downgraded the senior unsecured issuer and debt ratings of MISC BHD [] to Baa2 from Baa1. The outlook on the ratings remains negative.

It said on Thursday the rating action reflects a weaker than expected performance for the nine months ended December 2011, higher-than-tolerance leverage, and Moody's view that the company's cash flows are unlikely to materially improve over next 12 to 18 months given the weak industry outlook.

“The outlook on the ratings remains negative, reflecting Moody's concerns about a substantial funding gap for the year 2012, which if funded by debt may result in a further increase in leverage,” it said.

A Moody's vice president and senior analyst Vikas Halan said MISC’s operating performance was particularly weak in its petroleum and chemical shipping segments, both of which reported operating losses higher than expectations.

“Overcapacity in both petroleum and chemical segments has resulted in lower freight rates in the spot markets. This, combined with high fuel costs, have resulted in lower margins for the period. We do not expect the situation to improve materially in 2012,” he said.

Halan added MISC’s operating lease adjusted debt/ annualised EBITDA was at 7.8 times as of Dec 31, 2011, which was well beyond the ratings agency’s tolerance level for its ratings.

“The exit the from liner business announced in November 2011 will cut losses in that segment and will improve overall EBITDA. However, the company's committed capex of nearly a US$1.0 billion in 2012 will limit its ability to improve its credit metrics,” he said.

Moody’s said MISC's liquidity was weak. Although it has large cash balance of RM4.2 billion but it also has committed capital expenditure of RM3.2 billion and over RM5.9 billion of debt maturing in the current year.

Moody's expects MISC to continue to have access to external funding given its past track record and both direct and indirect support from Petrliam Nasional Bhd.

The ratings agency also said if there was a protracted disruption in company's ability to fund itself, albeit unlikely, would result in further pressure on the ratings.

MISC's Baa2 ratings reflects both the strong support provided by its parent, Petronas (A1/Stable) and its standalone rating of now Ba2, which was lowered from Ba1.

The stand-alone rating continues to reflect: (1) the company's ability to secure vessel contracts by aligning its business development with its parent Petronas; (2) the diversified nature of its fleet and its leading market position in LNG transportation, which provides stable income; and (3) the term contracts that provide nearly half of its revenues from shipping segments and offers some protection against the cyclicality in freight rates.

However, these strengths are counter-balanced by: (1) excess global capacity in the liner, petroleum, and chemical transportation sectors, which could pressure the company's freight rates and profit margins; and (2) substantial capital expenditures requiring additional debt funding, which will result in higher debt leverage and negative cash flow in the short to medium term.

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