Fitch Ratings-London-08 May 2013

Fitch Ratings has affirmed MB Holding Company's (MBHC) Long-term Issuer Default Rating (IDR) at 'BB-'. The Outlook has been revised to Negative from Stable. A full list of rating actions is at the end of this release.

Fitch revised MB Holding Company (MBHC) and MB Petroleum Services' (MBPS) Outlooks to Negative from Stable because we are concerned that financial performance, acquisitions and investments elsewhere in the group could encumber MBHC's equity injections that MBPS relies on to service debt. Fitch is concerned that lower commodity prices could decrease dividend payments from the E&P and mining subsidiaries to the holding company (MBHC) needed to subsidise MBPS. Additionally, the mining business is making acquisitions in new areas such as phosphate mining, and may have higher future capex requirements that could divert funds away from MBPS.

KEY RATING DRIVERS

- MBPS Still Underperforming

The operational performance of MB's petroleum services business remains weak. For example, EBITDA declined to USD47m in 2012, down 8.7% vs. 2011 and down 22% compared to 2010. Margins are also contracting. 2012 EBTIDA margin was 9.6%, down from 11.4% in 2011 and 13.8% in 2010. Free cash flow (FCF) continues to decline and leverage is rising. 2012 net debt to EBITDA is 8.8x compared to 8.1x in 2011 and 6.1x in 2010. Fitch views MPBS's stand-alone credit profile as distressed.

- Century Drilling Scaled Back

MBPS has decided to materially scale back Century Drilling's operations in the Asia Pacific region in response to severe underperformance. Focus is now on business consolidation and margin improvement. Fitch views the absence of cash flow from Century Drilling as negative for both MBHC and MBPS' Outlooks because it means MBPS is prolonging its dependence on equity injections from MBHC to service debt obligations and fund other expenditure such as capex.

- Parental Support Vital

Fitch views MBPS's standalone credit profile as distressed and in line with a 'CCC' stand-alone rating, but the agency assesses the legal, operational and strategic ties between MBHC and MBPS as being strong enough under the agency's Parent and Subsidiary Rating Linkage Methodology to align the two ratings. Fitch anticipates MBPS will continue to rely on MBHC for financial support (combined equity injections and shareholder loans) over 2013 to meet financial obligations in a timely manner.

- E&P Oil Price Vulnerable

Petrogas remains the group's strongest operating division and is responsible for about 60% of MBHC's USD403m EBITDA in 2012. Fitch anticipates EBITDA in 2013 will decline by about USD10m and decline by a further USD8m in 2014 applying our oil price deck of USD100/bbl in 2013 and USD92/bbl in 2014. This contraction is not severe enough on its own to warrant any rating action, but taken in the context of weak performance at MBPS, any variation in group cash flow is a potential weakness at the current 'BB-' rating level. This is another factor supporting the Negative Outlook.

- Sizeable Mining Investments Coming

MBHC is diversifying Mawarid Mining (MM) through investments outside traditional Omani copper and gold mining partly because Mawarid anticipates deterioration over time in the quality of copper ore mined in Oman, which will result in lower realised pricing and increased production costs. One of the most significant investments is MM's effective 50.5% stake in Namibia Marine Phosphate Ltd (NMP). MM would like to increase its stake in NMP to 85%. Fitch believes this will also increase MM's capex commitments by around USD132m in 2013-2014 to fund NMP's Sandpiper project. The additional capital commitments could be a significant cash drain for MBHC until Sandpiper's first commercial shipments commence in H214.

RATING SENSITIVITIES

The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade.

Negative: Future developments that could lead to negative rating action include:

- Failure to implement the consolidation/margin improvement strategy at MBPS in 2013

- Underperformance at the company's E&P division that reduces group cash flow

- Material debt financed acquisitions that materially increase leverage

- Significant increase in capital expenditure that reduces the company's free cash flow

- Deterioration in the company's already weak liquidity position (slowing cash flow generation used to service short-term debt)

- Funds from operations (FFO) adjusted gross leverage consistently above 2.5x

- FFO interest coverage consistently below 5x

LIQUIDITY AND DEBT STRUCTURE

Fitch views MBHC's liquidity as weak. Cash plus available credit lines of USD157.5m are not enough to cover near-term debt maturities of USD235.9m including bank overdrafts as of 2012. Access to financing via local banks appears satisfactory and Fitch anticipates MBHC will refinance upcoming maturities with local banks where relationships are strong. Fitch believes that MBHC could also make additional cash available by liquidating listed investments from its investment portfolio (approximately USD94.2m) or through a reduction in capex and dividends.

The rating actions are as follows:

MB Holding Company LLC (MBHC)

Long-term IDR: affirmed at 'BB-'; Outlook revised to Negative from Stable

MB Petroleum Services LLC (MBPS)

Long-term IDR: affirmed at 'BB-'; Outlook revised to Negative from Stable

MB Finance Company

USD320m Senior Unsecured Bond: affirmed at 'BB-'

Contact:

Principal Analyst

Maria Yakushina

Analyst

+44 20 3530 1315

Supervisory Analyst

Jeffrey Woodruff, CFA

Senior Director

+44 20 3530 1281

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Committee Chair

Alex Griffiths

Senior Director

+44 20 3530 1033

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available at www.fitchratings.com.

Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012 are available at www.fitchratings.com.


Applicable Criteria and Related Research 
Corporate Rating Methodology

Additional Disclosure

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© Press Release 2013