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Hong Kong, June 04, 2009 -- Moody's Investors Service has downgraded MISC Berhad's ("MISC") issuer and senior unsecured debt ratings to A3 from A2. At the same time, Moody's has changed the outlook of both ratings to stable from negative. "The downgrade has been driven by the company's weaker-than-expected performance -- which includes lower profit margins and a higher debt level -- in FY2009 (ending in March 2009) against the backdrop of weak shipping markets," says Peter Choy, a Moody's Vice President and Senior Credit Officer, adding "In particular, the huge loss in its liner business was the main contributor to the unfavourable result." "Moody's expects MISC will remain exposed to the challenging conditions in the liner, chemical and petroleum transportation markets for the next two years," says Choy. "In addition, MISC's liquidity position will be under pressure from a sizeable order placed by the company for tankers and a business target of increasing investments in offshore production facilities, and which both entail large capital spending over the next two years" says Choy. "As a result, MISC's key financial metrics had exceeded the tolerance level set for the previous A2 rating," adds Choy. Furthermore, its A3 rating reflects a combination of the strong support from its parent, Petronas (A1/Stable), and its standalone rating of Baa3. MISC's fundamental rating of Baa3 reflects (a) its ability to secure vessel employment through aligning its business development with that of its parent; (b) the diversified nature of its fleet and a leading market position in LNG transportation that provides stable income; (c) the fact that more than 50% of its revenue are protected by term contracts against the cyclicality in freight rates; and (d) its good management track record. However, these strengths are counter-balanced by: (1) increased capacity in the liner, petroleum and chemical transportation sectors, which could add pressure to the company's freight rates and profit margins; and (2) substantial capital expenditures requiring additional debt funding, which will result in higher debt leverage and negative cash flow during coming years. The stable outlook is based on Moody's expectation that (1) MISC's management will take active measures to reduce the losses in its liner and chemical segments, (2) it will continue to have good access to the banking and capital markets to fund its committed capital expenditures, and (3) it will take actions to comply with the financial covenants in its borrowings. Downward rating pressure may emerge if: (a) MISC's financial profile shows consistent deterioration due to further pressure on its profit margins, arising from protracted weak shipping market conditions; and/or (b) there are further debt-funded capital outlays beyond those currently committed, such that its credit metrics weaken, as evidenced by sustained negative free cash flow; Debt/EBITDA exceeding 5x -- 5.5x; or EBIT interest coverage falling consistently below 2.0x - 2.5x in the medium term; (c) changes in the relationship between Petronas and MISC -- including, but not limited to, the reduction of Petronas' ownership and business sponsorship -- weaken support for MISC; or (d) Petronas' own rating is downgraded. Upward rating pressure is unlikely in the next 12 to 18 months, given the challenging conditions in the shipping markets and the loss-making evident in MISC's liner segment. The last rating action was on 27 February 2009 when the MISC's rating outlook was changed to negative from stable. The principal methodology used in rating MISC was the Global Shipping Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating MISC can also be found in the Credit Policy & Methodologies directory. MISC was established in 1968 as a liner company and listed on the Kuala Lumpur Stock Exchange in 1987. Since then, it has refocused its business from liners to energy transportation, becoming a subsidiary of Petronas, the state-owned energy company, in 1998.