Singapore, December 06, 2012 -- Moody's Investors Service today affirmed the Baa2 issuer ratings on MISC Berhad ("MISC") and changed the outlook back to stable from negative.
At the same time, Moody's has also affirmed the ratings on the USD-denominated bonds issued by MISC Capital and guaranteed by MISC.
The rating action follows the company's decision to sell a 50% stake in its Gumusut - Kakap semi-floating production system to a wholly owned subsidiary of Petroliam Nasional Berhad (Petronas, A1/stable).
Petronas is the Malaysian government-owned oil company and also the parent of MISC.
The transaction will result in proceeds of USD1.7 billion out of which MISC will use USD1.25 billion to prepay its borrowings and the balance will be used to fund capital expenditure and transaction expenses.
"The repayment of debt will help improve MISC's credit metrics, such that operating lease adjusted debt/EBITDA for 2012 and 2013 will be well within our tolerance level of 6.0x for its ratings. The receipt of the proceeds will also lead to a significant improvement in MISC's liquidity profile," says Vikas Halan, a Moody's Vice President and Senior Analyst.
"The decision by MISC to reduce its borrowings reflects its commitment to restoring its financial profile, which has suffered from a prolonged downturn in the shipping sector," says Halan.
"Although our outlook for the sector remains negative, and we believe that MISC will continue to face challenges at least until 2014, the transaction will place it on more solid ground to weather these challenges within its current rating," says Halan.
"The transaction also reinforces our expectation of extraordinary support from its parent Petronas, which results in a three-notch uplift of MISC's issuer ratings from its stand-alone rating of ba2," says Halan.
"In addition to lowering its debt, MISC has already announced an exit from its loss-making liner business, which will result in improvements in its EBITDA for 2012 and beyond,". adds Halan.
The expected improvement in EBITDA will, however, be constrained by declining charter rates for the company's tankers and weak performance in its heavy engineering segment. For July-September 2012, MISC reported a 26% decline in EBITDA, which was mainly attributable to a one time provision of higher than expected expenses on one project in its heavy engineering segment and forex losses.
MISC's Baa2 ratings continue to reflect both the strong support provided by its parent Petronas and its standalone rating of ba2. They also reflect (1) the company's ability to secure vessel contracts by aligning its business development with 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 over half of its revenue from its shipping businesses and that offer some protection against the cyclicality in freight rates.
However, these strengths are counter-balanced by (1) excess global capacity in the petroleum and chemical transportation sectors, which could pressure the company's freight rates and profit margins; and (2) reduced, although still relatively high financial leverage.
Downward pressure on the rating could build if MISC decides to embark on new business expansion that results in substantial negative free cash flows and higher debt. Credit metrics indicative of increasing stress on the rating would include operating lease adjusted debt/EBITDA above 6.0x and EBIT/Interest below 1.5x, both on a sustained basis.
Upward pressure on the ratings in the near term is unlikely, given the weak fundamentals of the shipping industry. Upward pressure may arise if charter rates and MISC's profitability increase over time, such that operating lease adjusted debt/EBITDA falls well below 5.0x and EBIT/Interest remains above 2.5x, both on a sustained basis.
The principal methodology used in rating MISC was the Global Shipping Industry Methodology published in December 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
MISC Berhad ("MISC") was established in 1968 as a liner company and was listed on the Kuala Lumpur Stock Exchange in 1987. In 1998, it became a subsidiary of Petroliam Nasional Berhad ("Petronas"). It provides Petronas with logistics solutions and is its exclusive transporter of liquefied natural gas.
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Vikas Halan Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Philipp L. Lotter MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Releasing Office: Moody's Investors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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