RAM Ratings reaffirms ratings of RGB International’s debt issue

Published on 29 October 2012

RAM Ratings has reaffirmed the long- and short-term ratings of RGB International Bhd’s (RGB International or the Group) RM97 million Commercial Papers/Medium-Term Notes Programme (2007/2014) (CP/MTN) at BB2 and NP, respectively. The negative outlook on the long-term rating has been maintained. RGB International procures and manages slot machines at licensed casinos/gaming venues under concession agreements (TSM concessions), on behalf of the venue/licence owner. It currently has TSM concessions in Cambodia, the Philippines, Macau, Laos and Myanmar. The Group is also involved in the outright sales and marketing of slot machines and other gaming equipment.

The Group remained in the red for the fourth consecutive year with a pre-tax loss of RM32.87 million in FYE 31 December 2011 (FY Dec 2011) (2010: RM59.47 million), after the closure of gaming operations in hotels and clubs in Cambodia in 2008/09 as a result of regulatory changes. Apart from the loss of income, RGB International incurred hefty impairment and depreciation charges in respect of its slot machines.  As such, its balance sheet deteriorated further, with its gearing ratio increasing year-on-year (y-o-y) from 1.48 times to 1.66 times as at end-December 2011. That said, RGB International managed a marginal pre-tax profit of RM0.71 million in 1H FY Dec 2012, supported by an increase in TSM income and reduced depreciation charges on slot machines under its concessions (after full depreciation and write-off of some machines to zero value and the disposal of slots under a concession). Following healthier performances by the Group’s concessions in the Philippines and Laos, the TSM segment’s revenue rose 16.7% in 1H 2012. Accordingly, its annualised funds from operations advanced to RM55 million (1H 2011: RM39 million).

Meanwhile, RGB International’s liquidity stayed tight. As at end-December 2011, it had RM98.09 million of short-term borrowings against cash balances of only RM32.50 million. The Group had also displayed longer payables cycle since 2009, compared to its historical trends. RGB International’s short-term debt mainly comprised non-underwritten CP. Despite not being underwritten, it is observed that noteholders’ support in the roll-over of outstanding CP has been forthcoming, albeit at a higher interest rate. To alleviate its liquidity concerns, RGB International proposes to refinance its CP/MTN (with an unrated programme), allowing repayment of its obligations to be spread out over a longer maturity.

RAM Ratings continues to maintain a negative outlook on the Group’s long-term rating, in view of its precarious liquidity position and still-challenging business outlook. We opine that the successful refinancing of its CP/MTN is of significant importance. At the same time, a sustainable improvement in the performance of its TSM segment is critical to preventing any further deterioration of its balance sheet and liquidity. RGB International is required to bear the upfront costs of slot machines under its TSM concessions. We caution that its gearing ratio will worsen should it draw down substantial borrowings for asset purchases. Any further deterioration of the Group’s financial and liquidity positions may exert downward pressure on its ratings. On the other hand, the rating outlook may be reverted to stable if RGB International is able to address its liquidity strain and/or demonstrate sustainable improvement in its business and financial profiles.

Elsewhere, the Group’s operations remain vulnerable to regulatory changes which could disrupt its business. The gaming industry is often subject to regulatory controls, given its addiction factor and impact on social health. RGB International’s SSM and TSM businesses are also dependent on the expansion and capital-expenditure programmes of gaming establishments.

Despite the abovementioned challenges, the ratings take into account a degree of revenue stability that the Group derives from its TSM concession agreements, which generally run for an initial 5 years. Its established relationships with its clients and suppliers are also expected to give it an edge in the longer term.

Media contact

Evelyn Khoo

(603) 7628 1075

evelyn@ram.com.my