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RAM Ratings lifts Negative Rating Watch and downgrades Borcos' unguaranteed issue.

RAM Ratings has lifted the Negative Rating Watch on the rating of Syarikat Borcos Shipping Sdn Bhd's (Borcos or the Group) MYR 160 million Sukuk Ijarah MTN Programme (2008/2014) (MYR 160 million IMTN) and concurrently downgraded the AA3 rating to A3/Stable.

The Negative Rating Watch on the AAA(bg) ratings of Borcos' MYR 125 million Bank-Guaranteed Sukuk Ijarah MTN Programme (2010/2017) and MYR 30 million Bank-Guaranteed Bai' Bithaman Ajil Islamic Debt Security (2010/2017), collectively known as the Bank-Guaranteed Issues, has also been lifted, and the ratings reaffiMYR ed with a stable outlook.

The downgrade is premised on the sharp deterioration in the Group's operating and financial profiles, which in our view, had been exacerbated by deficiencies in business oversight and direction due to abrupt and frequent changes in senior management. Since mid-2013, the consistently low utilisation of several vessels, including Borcos' 2 largest and newest anchor handling tug supply vessels, severely impacted its financial performance. The Group's weak liquidity position means that it largely depends on support from its ultimate parent, Bank Pembangunan Malaysia Berhad (BPMB), to service its short-teMYR debt and even operational costs. Borcos has seen 2 wholesale changes in senior management within the past year and is currently overseen by management personnel from the Group's intermediate holding company. We expect Borcos' business direction to remain in flux until a new management takes office.

The rating of the unguaranteed MYR 160 million IMTN reflects the credit profile of Borcos, benefiting from a multiple-notch uplift, in view of the high likelihood of extraordinary support from BPMB. Besides a strongly-worded letter of support in respect of the MYR 160 million IMTN, we note that a cross-default clause under the MYR 160 million IMTN and the Bank-Guaranteed Issues enhances the incentive for BPMB to provide financial support. In addition, BPMB has demonstrated continued support of the Group in the form of advances and loans, following Borcos' poor operational performance and strained liquidity position.

Meanwhile, the enhanced ratings of the Bank-Guaranteed Issues reflect BPMB's unconditional and irrevocable guarantee, which enhances the credit profile of the debt issues beyond Borcos' stand-alone credit strength. The Negative Rating Watch on the ratings of these issues was lifted and the enhanced ratings reaffirmed following the extension of BPMB's unconditional and irrevocable bank guarantee to cover one period's profit payment, in addition to the original guarantee which covered only the principal amount of the said issues.

The rating of the MYR 160 million IMTN was first placed on Negative Rating Watch on 20 December 2013, primarily due to the deterioration of Borcos' stand-alone credit profile as a result of its stressed liquidity profile and weaker business profile. At the same time, the ratings of the Bank-Guaranteed Issues were placed on Negative Rating Watch, following the withdrawal of monies from the Finance Service Reserve Account (FSRA) to service intermediate profit payments, which is a technical breach of obligations under the transaction documents. Funds in the FSRA were meant to be used for the final profit payment of the issues or upon crystallisation of the bank guarantee. Although the FSRA has been replenished, concerns remain on the integrity of controls in respect of the withdrawal of monies from the FSRA.

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Publication:CPI Financial
Date:Sep 10, 2014
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