RAM Ratings has placed the AA3 ratings of Kencana Petroleum Berhad's (Kencana or the Group) proposed RM350 million Sukuk Mudharabah (with detachable warrants) (2011/2016) (Sukuk Mudharabah-W) and proposed RM700 million Sukuk Mudharabah Programme (2011/2026) (Sukuk Mudharabah) (collectively known as "the proposed Sukuk") on Rating Watch, with a developing outlook. The Rating Watch is premised on the proposed merger of Kencana's business with that of SapuraCrest Petroleum Berhad (SapuraCrest).
On 16 June 2011, RAM Ratings had assigned preliminary AA3 ratings to Kencana's proposed Sukuk; the final ratings are hereby assigned following the formalisation of its transaction documents. The AA3 ratings are supported by Kencana's strong position as one of Malaysia's leading oil and gas (O&G) players in the engineering and fabrication segment. The Group is estimated to command approximately 20% of this local market and has a proven track record on prompt delivery within budget.
On 11 July 2011, Kencana announced that it had received an offer from Integral Key Sdn Bhd (IKSB, a special-purpose vehicle of Mayban Ventures Sdn Bhd that has been incorporated to undertake the corporate exercise) to acquire the Group's entire business and undertakings, including its assets and liabilities, for RM5.98 billion in total; the offer would be satisfied by new IKSB shares and cash. IKSB had simultaneously made a similar offer to SapuraCrest. The proposed corporate exercise could see the creation of Malaysia's biggest O&G service provider by assets; the merged entity is also anticipated to be the world's fourth-largest non-national O&G service provider by market capitalisation.
RAM Ratings opines that the businesses of Kencana and SapuraCrest are complementary and the merged entity would be better poised to secure larger contracts. Kencana mainly provides offshore and onshore engineering and fabrication services, hook-up and commissioning services, drilling services and marine support vessels. SapuraCrest is involved in drilling services, installing offshore pipeline and facilities, marine services as well as operations and maintenance services. Kencana and SapuraCrest (via Sapura Energy Ventures) are currently consortium partners (together with Petrofac Energy Development Sdn Bhd) in the development and operation of the Berantai marginal oil field off Terengganu, under a risk-service contract awarded by Petroliam Nasional Berhad. That said, it is rather premature to quantify the synergistic benefits that may arise from the proposed merger. We are also mindful of the complexities in integrating the operations of the 2 entities.
"Based on the latest pro-forma financials of Kencana and SapuraCrest as well as our understanding of the Group's pre-merger expansion plans, the merged entity's funds from operation debt coverage ratios could be weaker than previously anticipated for Kencana. Nonetheless, we caution that we are not privy to SapuraCrest's capital expenditure and financing plans at this juncture. The merged entity may also have additional investment or business plans that could alter its leverage and cashflow protection metrics," says Kevin Lim, Head of Consumer & Industrial Ratings.
In the event Kencana rejects the acquisition offer on or before 15 August 2011, the Rating Watch will be lifted and the rating outlook will revert to stable. If Kencana accepts the offer, we will need to conduct a thorough assessment on the credit profile of the merged entity; the Rating Watch would then be resolved following the outcome of such analysis.
RAM Ratings' Rating Watch highlights a possible change in an issuer's debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.
Issues will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A "developing" outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.
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Media contact
Ben Inn
(603) 7628 1024
ben@ram.com.my
© Press Release 2011
