Fitch Ratings has affirmed MB Holding Company’s (MBHC) Long-term Issuer Default Rating (IDR) at ‘BB-’. The Outlook is Negative. A full list of rating actions is at the end of this release.
The Negative Outlook continues to reflect the risk that a deterioration in financial performance and increased investments elsewhere in the group could encumber the MBHC equity payments that MB Petroleum Services LLC (MBPS) relies on to service debt. Financial results at MBPS have stabilised but remain weak, while the performance of the mining segment (Mawarid Mining) deteriorated in 2013. Significant investments being considered in new areas such as phosphate mining may result in higher future capex requirements. This is another potential use of funds that could compete with MBPS’s future equity injections.
KEY RATING DRIVERS
MBPS Stabilised but Underperforming
The operational performance of MB’s petroleum services business remains weak compared with historical levels. In 2013, EBITDA increased only modestly to USD55m compared with USD50m in 2012, which followed two successive years of declines. Margin improvement was more significant, increasing to 14% versus 11% in 2012. Free cash flow (FCF) remained negative but net debt fell by USD119m due to a USD157m equity contribution. Accordingly net EBITDA leverage fell to 5.4x from 8.9x in 2012.
Parental Support Vital
Fitch views MBPS’s standalone credit profile as being in the ‘B-’/’CCC’ range on a standalone basis, but factors in strong operational and strategic ties between MBHC and MBPS under its Parent and Subsidiary Rating Linkage Methodology because of combined equity injections and shareholder loans. Accordingly, their ratings remain aligned. Fitch believes that MBPS will continue to rely on MBHC for financial support over the next 12 months.
Potential Sizeable Mining Investments a Concern
MBHC is diversifying Mawarid Mining (MM) through investments outside traditional Omani copper and gold mining partly because MM has experienced deterioration in the quality of copper ore mined in Oman, resulting in lower realised pricing and increased production costs. Diversification is coming from stakes in Nautilus Minerals Inc (27.71% shareholding) and the Sandpiper Phosphate project in Namibia. MBHC holds an effective 85% stake in the latter project.
Capex to develop the Sandpiper project is not expected to be significant in 2014 but will ramp up in subsequent years if MBHC makes a final investment decision and regulatory issues are resolved in Namibia. We do not currently include the investment in our forecasts as the exact capex is yet to be determined, but based on initial estimates (USD320m) the investment could lead to leverage metrics exceeding our guidance and negative rating action.
Century Drilling Scale Back Progressing
MBPS previously outlined plans to materially scale back Century Drilling’s operations in the Asia Pacific region in response to severe underperformance (loss at the EBITDA level in 2012). The focus now is on business consolidation and margin improvement. Of the 11 rigs operating in the Asia Pacific region, one has been sold and two rigs transferred to Oman. The group also entered into a strategic alliance with Todd Energy to manage staffing levels for drilling activity. Consequently, EBITDA generation turned positive at USD6m.
E&P Oil Price Vulnerable
Petrogas remains the most important operating division of the group and was responsible for 78% of MBHC’s EBITDA of USD325m in 2013. Fitch expects that the E&P segment will remain the main contributor to consolidated EBITDA despite the projected decrease in financial performance mainly due to Fitch’s conservative oil price deck (USD96/bb in 2014, USD91/bbl in 2015, USD85/bbl in 2016 and USD80/bbl long term).
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- 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 FCF (eg the Sandpiper marine phosphate project).
- Deterioration in the company’s liquidity position (slowing cash flow generation used to service short-term debt).
- FFO adjusted gross leverage consistently above 3.0x.
- FFO interest coverage consistently below 5x.
Positive: 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. Future developments that could Stabilise the rating Outlook include:
- Better than expected performance at the services and mining segments.
- FFO adjusted gross leverage consistently below 2.0x.
LIQUIDITY AND DEBT STRUCTURE
Cash of USD107.8m at end-March 2014 (excluding available liquid investments of USD122.9m) is not sufficient to cover near-term debt maturities of USD275.3m (including bank overdraft). Undrawn committed credit lines totalled USD181m. Access to financing via local banks appears satisfactory and Fitch expects MBHC will refinance upcoming debt maturities with local banks. Fitch believes that MBHC could also make additional cash available through a reduction in growth capex or dividends.
FULL LIST OF RATING ACTIONS
Long-term IDR: affirmed at ‘BB-’; Outlook Negative
Long-term IDR: affirmed at ‘BB-’; Outlook Negative
MB Finance Company
USD320m senior unsecured bond: affirmed at ‘BB-