India Ratings Downgrades ABG Shipyard to ‘IND BBB’

India Ratings has downgraded ABG Shipyard Limited’s Long-Term Issuer rating to ‘IND BBB’ from ‘IND A-’ and maintained it on Rating Watch Negative (RWN). The agency has also downgraded the company’s INR2bn non-convertible debenture programme to Long-Term ‘IND BBB’ from ‘IND A-’ and maintained it on RWN.

The ratings are based on a consolidated view of ABG Shipyard and its subsidiaries. The downgrade reflects ABG Shipyard’s continued strained liquidity position due to its delays in executing a novation agreement with a large client and an associate company. The rating action is based largely on publicly available information as India Ratings was unable to receive the management’s perspective on the current liquidity situation.

After the client failed to offtake two oil rigs worth USD21,485m from ABG Shipyard earlier this year, the latter decided to sell the rigs to its associate company, which was to fund the purchase of rigs through an issue of bonds. As the bond issuance has been delayed, the agency expects ABG Shipyard’s liquidity profile to have weakened significantly, due to large work-in-progress inventory relating to the rigs.

In FY12, the company had availed large additional debt to support its higher working capital requirements, which led to a substantial weakening of its credit metrics. Financial leverage (net adjusted debt/op. EBITDA) increased to 5.87x in FY12 from 4.74x in FY11 and EBITDA interest coverage declined to 2.04x from 2.48x.

The RWN reflects potential further delays in the placement of the bonds leading to delays in the sale of oil rigs to the associate company. This could cause the company’s working capital position to be strained in FY14 as well. India Ratings expects to resolve the RWN by 31 March 2013 by which time the bond issuance could possibly be completed. The agency believes that ABG Shipyard could also face challenges in refinancing its short-term debt obligations till such time that the rigs are sold. Considering the weakness observed globally and domestically in this industry, any future delays by other clients in taking deliveries could further impact the financial profile of the company.

The ratings are also constrained by the corporate guarantees given by ABG Shipyard to group entities, and the cyclical nature of the global shipping industry which impacts the revenue of ship building companies. India Ratings however notes that the company has traditionally manufactured small- to mid-size vessels for which the demand has been less cyclical compared with the demand for large-size vessels.

The ratings reflect the company’s dominant position in the Indian shipbuilding industry, its proven track record in shipbuilding and its ability to manufacture a diverse range of vessels. Also, the company has a large order book providing revenue visibility for at least five years. Despite the slowdown in the global shipping industry, ABG Shipyard has displayed revenue growth at a CAGR of 20.5% over FY09-FY12, while maintaining average EBITDA margin of 27.9%.

In the medium term, while the company is likely to maintain revenue growth of at least 9% a year on average, a slight decline in EBITDA margins could result from a decrease / non-availability of government subsidies.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may lead to negative rating action include:

• inability of ABG Shipyard’s associate company to issue the proposed bonds or put in place other measures to improve liquidity by 31 March 2012

On the other hand, a significant improvement in the liquidity position would lead to rating affirmation. The agency would be in a position to define the Outlook based on clarity on issues such as status of orders and their execution, debt servicing and liquidity cushion available to the company.

Incorporated in 1985, ABG Shipyard is the largest privately owned shipbuilding company in India. Till FY12, it had constructed and delivered 152 vessels of various types. Its manufacturing facilities are located at Surat and Dahej. For FY12, it reported operating revenues of INR24,724.8m (FY11: INR21,338.4m) and EBITDA margin of 28.3% (27.3%).

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Press Release, January 4, 2013