Petroleum hub project no rating impact on Muhibbah’s Islamic Bonds

KUALA LUMPUR, Jun 22 — Malaysia’s RAM Ratings views the recent news on the receivership status of the owner of the petroleum hub project at Tanjung Bin, Johor (APH project), to have no rating impact on Muhibbah Engineering (M) Bhd’s (Muhibbah or the Group) RM130 million Islamic Bonds. Muhibbah is one of the contractors for the APH project.

Muhibbah’s Islamic Bonds carry a AAA(s) rating with a stable outlook, supported by the irrevocable and unconditional guarantee from Malayan Banking Berhad (Maybank) to honour Muhibbah’s irrevocable and unconditional undertaking to purchase and cancel all the Islamic Bonds at the exercise price upon the declaration of an event of default (Purchase Undertaking).

The Trustee, on behalf of the bondholders, will be able to call on the bank guarantee to honour Muhibbah’s Purchase Undertaking. The guarantee from Maybank enhances the credit profile of the Islamic Bonds beyond Muhibbah’s inherent or stand-alone credit standing.

It was reported that the financier of the APH project, CIMB Bank Berhad, has appointed a receiver and manager for the developer and operator of the APH project. The outstanding amount owed to Muhibbah for certified works done on the project and related costs stood at RM370.8 million as at 31 December 2010.

As it is, the Group’s stand-alone credit profile has been affected by its weaker-than-expected profit performance, balance sheet and debt coverage ratios, as well as its tight liquidity profile. The Group also faces collection issues, including the large aforementioned receivable for the APH project.

The project was halted in FY Dec 2009 partly due to the spike in raw material prices in 2008 which led to a ballooning of the project cost. It was reported that the project owner is currently negotiating with a new investor to bring in funds to resuscitate and complete the project, including making due payments to contractors. Nevertheless, negotiations had been rather protracted, and we view that it is unlikely for Muhibbah to collect the amount owed in the near term.

Nevertheless, RAM Ratings notes that Muhibbah has an established track record within the construction industry, specialising in oil-and-gas-related jobs, marine-engineering and civil-engineering jobs. Muhibbah’s outstanding order book of RM2.9 billion as at 19 May 2011 will sustain the Group over the next 2 years.

Muhibbah also derives earnings diversity, from its involvement in the construction, cranes and shipyard segments. It also enjoys recurring dividend income from its associate stakes in the concessionaire for road-maintenance work in Malaysia and an operator and concession holder for 3 international airports in Cambodia. — RAM Ratings



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