Fitch Ratings has downgraded Malaysia-based energy-service provider Serba Dinamik Holdings Berhad’s (SDHB) Long-Term Issuer Default Rating to ‘B-‘ from ‘BB-‘. At the same time, they have downgraded SDHB’s senior unsecured sukuk due 2022 and 2025 to ‘B-‘ from ‘BB-‘ with a Recovery Rating of ‘RR4’. The ratings have been placed on Rating Watch Negative (RWN).
The downgrade reflects the pressure on SDHB’s liquidity and the elevated refinancing risk from its short-term debt maturities in 2021 and its USD222 million sukuk due May 2022. Fitch believe’s the company’s access to debt funding has been compromised after its auditor, KPMG, requested an independent review when a 2020 statutory audit raised multiple questions over the company’s operations. The RWN takes into account the plans for the independent review and the uncertainty over the completion of the review, and the limited time to maturity of its bonds. Its expected to resolve the RWN following the completion of the review and the company demonstrating it has access to funding to enable it to refinance its upcoming debt maturities.
KEY RATING DRIVERS
KPMG, in the process of the 2020 statutory audit, requested for an independent firm to review SDHB to assess the veracity and accuracy of parts of its business. This includes a review of some of its suppliers as well as 11 customers accounting for total sales transactions of MYR2.32 billion, trade receivables balance of MYR652 million and materials-on-site balance of MYR569 million. An independent firm will be appointed within the next few days to start the review.
The scope of the work to ascertain the accuracy of the details is not finalised, making the review’s duration uncertain. SDHB has indicated it plans to complete the review within one month.
Refinancing Risk: Issues raised by KPMG and the review will constrain SDHB’s ability to access capital markets to manage its liabilities. It had MYR836 million in cash at end-2020 versus short-term debt due of MYR807.5 million. It raised MYR508.6 million in a private placement in February 2021 and drew down MYR100 million from Islamic commercial paper (ICP). It also has USD225 million of sukuk due in 2022 for which it may have to consider other refinancing options.
Fitch thinks the company had strong access to multiple forms of capital before the KPMG findings, which, combined with its proactive refinancing strategy, would have enabled it to refinance its short-term debt and undertake liability management. However, the independent review has hurt its ability to address its short-term maturities, resulting in the multiple-notch downgrade.
SDHB’s top priority under these circumstances will be to ensure the continuity of its operations. The opinions are cash will be deployed to ensure that its oil and gas service contracts are carried out smoothly, rather than servicing or redeeming debt. SDHB has indicated that its banks have not frozen or withdrawn any facilities to date. However, SDHB may face limited access to funds if the independent review reveals any anomalies.
High Working Capital, Capex: SDHB’s working-capital needs surged to MYR1 billion in 2020, from earlier projection of about MYR420 million, due to a disproportionate increase in inventory. Its estimated that, even if SDHB reins in its dividend distribution, its working capital and capex needs will use up cash of about MYR90 million-100 million per month. Hence, SDHB is reliant on increasing working-capital facilities to smoothen operations and bridge the time lag between the rendering of its services and the receipt of cash.
SDHB’s ‘B-‘ rating and RWN reflects its heightened liquidity risk following the questions raised over the quality of its earnings by its auditor, which gives rise to the possibility lenders may cut their exposure to the company, and investor or lender interest in the company may be constrained, if the audit review is unresolved or prolonged.
