RAM Ratings downgrades Silver Bird’s ratings to C3/NP, with negative Rating Watch

Published on 01 March 2012

RAM Ratings has downgraded the respective long- and short-term ratings of Silver Bird Group Berhad’s (“SBGB” or “the Group”) RM30 million Commercial Papers/Medium-Term Notes Programme (2005/2012) (“CP/MTN”), from A2 (negative outlook) and P2 to C3 and NP. We have concurrently placed the Group on Rating Watch, with a negative outlook.

The steep downgrade is premised on the heightened likelihood of default on the Group’s CP/MTN following a series of unfavourable developments announced on 29 February 2012. These include the failure of its wholly owned subsidiaries to repay their banking facilities amounting to RM5.37 million, a disclaimer of opinion expressed by the auditors on the Group’s audited accounts for FYE 31 October 2011 (“FY Oct 2011”), and the suspension from work of 3 key personnel (the group managing director, the executive director and a senior member of its management team).

Based on the terms of the CP/MTN and as stated in the trust deed, the default on the Group’s banking facilities constitutes a cross-default on the CP/MTN if the noteholders wish to exercise their rights. Meanwhile, the suspension from work of the 3 key personnel is to facilitate an internal inquiry into allegations of, among others, irregularities in the Group’s accounts. SBGB’s board has initiated a forensic review of its accounts, to be completed within 3 months. The Group is also expected to announce its plan on the regularisation of the abovementioned selective defaults.

Under the circumstances, RAM Ratings opines that SBGB’s repayment capacity on its RM15 million of outstanding CP/MTN (due on 15 April 2012) is now highly questionable. We note that certain numbers in the Group’s just-released audited FY Oct 2011 accounts vary substantially from those stated in its quarterly results announced on 30 December 2011. In particular, SBGB’s cash balances have been restated at only RM3.56 million, in contrast to the earlier RM35.84 million. Even if its repayment aptitude were to remain intact, the Group may opt to suspend payment of its financial obligations until the findings of the forensic review are revealed (i.e. as in the case of its subsidiaries’ RM5.37 million of banking facilities), which is likely to only take place after the maturity of the CP/MTN.

The negative outlook on SBGB’s previous ratings had reflected our concerns over its ability to expand its market share in the premium-bread market and preserve its already-thin margins amid rising costs. Moreover, the Group’s recent venture into the manufacture of dairy products exposes it to new risks.

The Rating Watch may be resolved following the completion of SBGB’s forensic review and regularisation plan, provided these are completed before 15 April 2012. Alternatively, the ratings will be downgraded to D should the Group fail to redeem the outstanding CP/MTN upon maturity.

RAM Ratings' Rating Watch highlights a possible change in an issuer's debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.

Issues will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

Media contact
Low Pui San
(603) 7628 1051
puisan@ram.com.my