KUALA LUMPUR: Fitch Ratings has downgraded Ranhill Bhd's credit rating outlook to negative from stable, while reaffirming its long-term foreign currency issuer default rating (IDR) at B.

Fitch said last Friday, March 19, that at the same time, it had affirmed the B- senior unsecured rating on the US$220 million (RM728 million) notes due 2011 issued by Ranhill (L) Ltd and guaranteed by Ranhill and its subsidiaries.

It said the revision of the outlook to negative reflected refinancing risks associated with the notes. Fitch said Ranhill currently had no firm plans to address this debt maturity and Ranhill's challenges included its limited unencumbered asset base and restricted access to US dollar bond markets.

Fitch said Ranhill's IDR reflected the volatile cash flows and risks associated with fixed-price engineering and construction (E&C) contracts which accounted for a majority of its revenues (60% of total revenues in FY09).

It said the rating also took into account Ranhill's still weak liquidity, despite improvements to its cash flows following the federalisation of its water assets in Johor in 2009.

Fitch said Ranhill's E&C operations had historically suffered from cost overruns and project delays. It said although many of its loss-making projects had been completed, or were nearing completion, there was significant concentration on the E&C order book, with a housing project in Libya accounting for over 70% of its order book.

The rating agency expects the Johor water operations to generate Ebitda of RM150 million-RM200 million per year, with limited capex under the new operating and management model.  It said about RM2.5 billion of debt associated with the former water concession was removed with the federalisation of assets and this improved consolidated indebtedness — RM1,789 million in December 2009 from RM4,074 million in June 2008 — and financial leverage — 3.4 times in 1H10 from 10.3 times in FY08 (measured by adjusted debt net of cash to operating Ebitdar).

Fitch notes that Ranhill is on track to increase its power generation capacity with its second power plant currently under construction.

It said the proceeds received from the water asset federalisation — of RM845 million — had been utilised to repay some debts at its water-operations level, and a bridge loan obtained by Ranhill to partially fund the capex of the second power generation plant.

Nevertheless, it said Ranhill's liquidity position was still relatively weak. At group level, Ranhill had RM503 million of cash reserves at December 2009, of which RM204 million was in restricted accounts backing various debt obligations of the group.