Monday, April 26, 2010

Twists and turns at Malaysian Merchant Marine Bhd

SHIPPING company Malaysian Merchant Marine Bhd (MMM) came to life in 1993, and was first introduced to the investing public when it was listed on the second board of the Kuala Lumpur Stock Exchange in 1997.

The company was doing fairly well, and during the oil and gas boom in 2003, MMM was the darling of Bursa Malaysia, with many analysts forecasting stellar earnings from the company’s expansion plans.

Things however took a turn for the worse about a year later when the company’s long-term charter strategy caused it to miss out on the bull run in shipping rates. Long dry-docking costs also ate into margins.

Datuk Ramesh Rajaratnam ... ‘the choice is to jump ship now or sink with it

In came Datuk Ramesh Rajaratnam as a substantial shareholder of MMM in December 2007, after he acquired 28.7%, or 50.4 million shares, and 470,000 Islamic preference shares from MMM’s substantial shareholder, oil and gas outfit M3nergy Bhd for some RM33.5mil.

M3nergy today still holds 20.9 million shares, or 11.9% of MMM.

Ramesh’s emergence in MMM as deputy executive chairman came with bold plans.

He had said in past interviews that he wanted to emulate Datuk Tony Fernandes, achieving in the shipping industry what Fernandes has done with AirAsia Bhd.

It’s now been two years, and it appears that those plans are nothing but pipe dreams. The company is today a financially distressed company, having fallen into the Practice Note 17 category in March this year.

For the nine months ended December last year, MMM’s net loss widened to RM17.3mil from RM4.5mil a year earlier on the back of RM29.7mil in revenue against RM76mil previously.

Malaysian Rating Agency Bhd (MARC) has been continuously downgrading MMM’s bonds from its A rating since Dec 19, 2009.

On April 2, MARC downgraded its rating on MMM’s RM120mil Al Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) to a D rating from a C rating.

This was due to MMM’s failure to meet a repayment of the BaIDS on March 29. MMM announced its default in payment on March 30.

What went wrong?

When Ramesh came in December 2007, MMM had a number of sea going vessels and although it had a very heavy debt position, it also had a strong cash balance.

Ramesh came in and streamlined the group’s operations by disposing non-core businesses and vessels that were either too old or those that appeared not to fit into its strategy “I attempted to go for a capital reduction exercise to clean up our balance sheet but that was voted down by the shareholders,” he said.

For a while, these strategies appeared to work and for the financial period ended 31 March 2009, MMM had returned to the black after several years of significant losses.

Then came the crash of the shipping sector in 2008. The Baltic Dry Index fell from about 12,000 points in late 2007 to about 700 points by May 2008. Suddenly, the demand for vessels worldwide dried up and the charter rates began to fall alarmingly.

That year, the company also sold its Mauritius-based charter brokering business MMM Ventures Ltd for US$4mil (RM13.25mil).

“Our vessels that were fully employed at about US$5,000 a day, were suddenly having off-hire days. When a vessel is off hire, the daily running cost of about US$3,500 was still being incurred. That’s RM10,000 per day per vessel,” he explained.

MMM’s single hull vessels that it had earmarked for sale were suddenly no longer in demand as similar capacity double-hull tankers were being offered at lower prices by many distressed sellers.

“It was not unusual to hear of vessels that were newly built at a cost of say, US$20mil, that were being sold off by the building yards at US$10mil to recover cash,” he said.

At that time, Ramesh’s strategy was to sell off its ageing fleet (vessels that were above 15 years) and with the monies raised, to buy a newer fleet.

However, with the world recession, MMM had no buyers for the old vessels and no funders for the new vessels. Hence, MMM chose to cancel or renege on those new buildings and suffer the deposit loss, which was a fraction of the real loss in write down value.

Said Ramesh: “When MARC downgraded us from A- to BB, all our funding efforts were severely scuppered. A local bank that had offered us US$ 77mil in funding for new vessels ordered, retracted that offer at the last minute. That was a period when the funding market worldwide was just too spooked to move,”

Ramesh said that MMM’s vessel suppliers were becoming more restrained in their credit policy and all these factors. Some of MMM’s customers also defaulted on their payments as they too were faced with similar challenges.

“This becames a time when ship-owners who had deep pockets could last out the storm. The smaller ones, had to consider abandoning ship or sink with it. MMM was not an exception to these challenges. In my capacity as an interested party, I was selling my shares and assets to finance the company through these tough times. At some point, I had to stop doing this,” he said.

Ramesh said he has been funding the company until a week ago, when he finally stopped.

“It is disappointing but as I’ve said earlier, the choice is to jump ship now or sink with it. Difficult choices are being made daily now,” he said.

Mistakes made

Currently, the only revenue generating asset of the company is the MMM Ashton, a double-hull vessel which is currently deployed under a bareboat charter contract.

MMM Ashton is targeted for disposal by May 2010 in order to meet MMM’s debt commitment. The net realisable value of the vessel, initially estimated at around US$11mil has now been revalued to US$5mil for the final RM24mil payment in BaIDS.

MMM has total debt obligations of some RM64mil.

The company’s other two ships are MMM Kingston and MMM Dayton, which have been put up for sale and have been written down to a cost of some US$50,000.

There have been various criticism on the company’s moves.

Questions have been raised as to why the profitable MMM Ventures was sold for only US$4mil, when its three vessels were being chartered out for some US13,000 per day.

There are also rumblings that all the ambitious plans were mere talk. While there were plans to acquire new vessels, none actually went through.

“MMM entered into a contract to buy a ship for US$40mil in December 2008. That never happened and MMM lost its deposit of US$4mil,” said an observer.

Furthermore, for the quarter of March 31, 2009, when MMM turned back to the black, there were no comparative figures available. This was because the group had changed its financial year from Aug 31 to March 31. The financial period was from Sept 1, 2007 to March 31, 2009, which was a 19 month period. Thus there were no applicable figures.

The observer added that he found it hard to believe that the two vessels, MMM Dayton and MMM Kingston had been written down to US$50,000. “Based on its weightage and specifications, it should be worth US$400,000 and US$600,000 respectively.”

Source: StarBiz

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