We believe the consent solicitation is essential for PERISAI to avoid default while having further discussion on potential debt repayment and restructuring. In view of its lingering weak balance sheet and poor earnings outlook, we maintain UNDERPERFORM rating on PERISAI with unchanged TP of RM0.16 peg to 0.3x CY17 PBV.

Consent solicitation. Last Friday, PERISAI announced that it will commence a consent solicitation process on 10 September 2016 to seek the approval of its medium-term note (MTN) holders to the followings; (i) waive the non-payment of principal and interest due on 3 October 2016, (ii) waive any non-compliance or potential noncompliance of minimum interest coverage ratio covenants for 3Q16, (iii) defer interest payment and postpone the maturity date to 3 February 2016, (iv) delete the Guarantor’s covenant to maintain a minimum interest coverage ratio commencing from 3Q16, and (v) waive any non-compliance with the provision of the MTN and occurrence of default or potential default.

Buying four months’ time. The meeting to pass through the extraordinary resolution will be held on the maturity day itself (3 October 2016) and PERISAI will need to get 75% approval of the members present in person or by proxy. Should this resolution is successful, PERISAI would be able to defer all the debt obligations (both interest and principal) to February next year without the worry of triggering any default.

Further negotiations needed. If PERISAI is able to delay the maturity date, it will try to discuss with MTN holders further to restructure the debt obligations, potentially splitting the repayment into different phases. Meanwhile, PERISAI is likely to exercise the put option to sell off 51% stake in SJR Marine, which owns the pipe-laying barge, Enterprise 3 to EOC Ltd for USD43.0m at the end of the year as well as its MOPU, Rubicone which has already been classified as “asset held for sale” for cash proceeds.

Earnings outlook remaining challenging. Going forward, PERISAI’s earnings outlook is expected to stay weak due to idling assets. As evident in 2Q16 results regarding the non-compliance of the interest cover ratio, PERISAI most probably won’t be able to meet its EBITDA to interest expense ratio of 3x in the coming quarters. This is mainly due to the reduction rate in its FPSO, Perisai Kamelia whereby the charter rates are pegged to oil prices. No changes to our FY17-18 earnings forecasts in view of flattish oil prices outlook.

Retain UNDERPERFORM call. Overall, we see no near-term rerating catalysts and selling pressure on the stock remains heavy over its lingering financial situation. Thus, we maintain our UNDERPERFORM call with an unchanged target price of RM0.16 pegged to FY17 0.3x PBV. Upside risks to our call are: (i) new contracts for its Jack-up rig, (ii) renewal of its FPSO contract or redeploy to other fields, and (iii) successful restructuring of its debt portfolio.

Source: Kenanga Research - 13 Sep 2016