Oman's MB Petroleum 'black sheep' of assets

What's Down: MB Petroleum Services' junk bond, among the Gulf's first high-yield debt securities, is starting to live up to its billing.

Dabbling in the murky world of junk bonds is often a fraught exercise, but not without rewards for yield-hungry investors.

Oman's MB Petroleum Services, an oilfield company, was one of the first companies in the region to tap markets with a "high-yield" issuance, as such bonds are also known.

But the bond's performance has lived up to its billing - in all the wrong ways - according to Exotix. The specialist investor in illiquid investments initiated coverage of the company's bonds with a "hold" rating yesterday.

MB's bonds, which mature in 2015 and pay a coupon of 11.25 per cent, currently yield 18.8 per cent. Yields on the bonds, which move in the opposite direction from price, were unchanged yesterday.

MB Petroleum is fully controlled by MB Holding (MBH), a conglomerate owned by Oman's Al Barwani family, and had been thought to be among its prize assets.

However, Exotix said the company was the "black sheep" of the family and was burning through cash.

"A closer inspection of this subsidiary's fundamentals and balance sheet reveals that it is actually MBH's most indebted and value-destructive asset," analysts wrote in a research report. It accounts for 70 per cent of the parent company's debts but only 14 per cent of earnings before interest, taxes, depreciation and amortisation.

"Barring a large cut in operating expenses or a meaningful refinancing of debt at lower rates, both of which we see as very unlikely, we expect the company to continue to operate in loss territory for the foreseeable future," the analysts wrote.

The ratings agency Standard & Poor's cut the bond's credit rating by three notches to CCC plus in November, citing a larger-than-expected shareholder payout and greater capital expenditures than forecast.

The payout to shareholders is particularly worrisome because it appears to have funded the family's other business ventures, according to due diligence conducted by Exotix.

The company is more highly leveraged as a result of US$54 million raised from banks last year. Not only that, the bonds are now subordinate to current bank debts, which defeats one of the main reasons investors prefer holding corporate bonds to equity, even with "junk"-rated companies.

In the event of default, bondholders usually get their money back first.

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