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RAM Ratings upgrades Borcos' rating following Bank Pembangunan's entry.

RAM Ratings has upgraded the rating of Syarikat Borcos Shipping's MYR 160 million Sukuk Ijarah Medium-Term Notes from A1 to 3; the outlook has been revised from negative to stable.

Concurrently, RAM has reaffirmed the A(bg) ratings of the Group's MYR 125 million Bank-Guaranteed Sukuk Ijarah Medium-Term Notes (2010/2017) and MYR 30 million Bank-Guaranteed Bai' Bithaman Ajil Islamic Debt Security (2010/2017) (collectively known as Bank-Guaranteed Issues), with a stable outlook. The enhanced ratings reflect the unconditional and irrevocable Kafalah guarantee extended by Bank Pembangunan Malaysia Berhad (BPMB), currently rated A/P1, with a stable outlook, by RAM).

The upgrade of the rating of the MYR 160 million IMTN follows the recent change in Borcos' shareholding structure, notwithstanding its weaker business and financial profiles. In January 2013, GMV Borcos Sdn Bhd (GMV Borcos) acquired the remaining 65 per cent-stake it did not own in Borcos from AWH Equity Holdings Sdn Bhd. GMV Borcos is wholly-owned by Global Maritime Ventures Berhad (GMV), which in turn is a 90 per cent-owned subsidiary of BPMB.

GMV is a marine venture-capital investment-holding company mandated by the Government of Malaysia to manage its MYR 500 million Shipping Venture Fund and to accelerate the development of the country's maritime industry. Apart from Borcos, GMV is increasing its investment in another company (involved in oil tankers) to a majority stake. Borcos and this company will be parked under a new investment-holding company (New Co) to be formed under GMV, following which GMV intends to list New Co by 1Q 2014.

RAM opines that Borcos derives financial flexibility from its new parent (BPMB) as part of GMV's flagship listed entity. GMV is viewed to be of strategic importance to BPMB's socio-economic role in developing its mandated maritime sector. RAM's assessment also takes into consideration BPMB's active involvement in the Group's strategic direction, with three representatives on the latter's board of directors. The financial flexibility is further highlighted by a strongly-worded Letter of Support provided by BPMB in respect of the RM160 million IMTN. Short of an outright guarantee, the document states that BPMB will ensure - either through equity, loans, grants and/or other means - that the Group will be able to meet its financial obligations on the debt issue throughout its tenure, on a full and timely basis. We note that the cross-default clause on the RM160 million IMTN and the Bank-Guaranteed Issues enhances the incentive for BPMB to provide financial support, should the need arise.

Apart from the financial flexibility derived from BPMB, the rating reflects Borcos' position as one of the larger local players in marine support services. The Group also enjoys some degree of income stability from its long-term time-charter contracts, although the proportion of these contracts versus short-term or spot charters has declined from approximately 80 per cent-90 per cent of revenue in 2008 to around 60 per cent currently. A higher proportion of short-term or spot charters is viewed negatively as it increases the Group's exposure to the volatility of daily charter rates and utilisation rates. Elsewhere, the Group also benefits from Petronas' commitment to domestic upstream investments and the cabotage policy, which favours local providers of marine support services. However, the rating is moderated by Borcos' modest financial metrics and exposure to contract-renewal risk.

Based on its 10M results for 2012, the Group's performance had eased slightly. While its top line remained largely unchanged y-o-y at MYR 134.70 million when annualised, its operating profit before interest, tax and depreciation dipped 2.3 per cent to MYR 63.53 million from additional costs incurred for its new vessel (Thahirah 2), which had been idle during 1H 2012. Meanwhile, the Group's heftier debt load had resulted in a higher gearing ratio of 2.25 times (end-December 2011: 1.94 times) and a weaker funds from operations debt cover of 0.13 times as at end-October 2012 (end-December 2011: 0.15 times). RAM understands that under the direction of its new shareholder, Borcos' capital expansion plans will be relooked. The Group is also expected to pare down its borrowings, which is anticipated to result in a healthier balance sheet and cashflow-protection metrics.

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Publication:CPI Financial
Date:Apr 9, 2013
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