Published on 23 November 2012
RAM Ratings has placed the
ratings of FEC Cables (M) Sdn Bhd’s (“FEC Cables” or “the Company”) facilities
(collectively known as “the Sukuk”), as follows, on Rating Watch, with a
negative outlook:
i) The enhanced
long-term rating of its RM130 million Islamic Medium-Term Notes Facility
(2006/2019)
(“IMTN”) at AA2(s);
ii) The enhanced
short-term rating of its RM20 million Murabahah Underwritten Notes
Issuance
Facility (2006/2013) (“MUNIF”) at P1(s).
FEC Cables – a company that
manufactures and sells mainly low- and medium-voltage power and
telecommunication cables – is 71.14%-owned by Permodalan Nasional Berhad
(“PNB”), Malaysia’s largest state-owned fund management company. On 31 May
2012, PNB announced its intention to divest FEC Cables, the first of 5 non-core
assets to be divested to qualified Bumiputera companies. More recently, we have
learnt from PNB that if the divestment is not completed in a timely manner, it
will, in conjunction with the Company, refinance/restructure the outstanding
Sukuk through other means in the coming months.
The negative watch on the Sukuk
reflects the uncertainties surrounding the timeliness of the proposed
refinancing/restructuring exercise. Given PNB’s intention to divest the
Company, it is our view that the incentive for it to support FEC Cables is no
longer at the level it was previously vis-Ã -vis a Letter of Support (“LoS”)
provided to the Trustee of the Sukuk. Stopping short of a guarantee, the LoS
states that PNB will ensure – either by equity, loans, grants and/or other
means – that the Company meets its financial obligations in respect of the
Sukuk in a full and timely manner. Moreover, while PNB can be relied on for
financial support in respect of the repayment of the Sukuk, FEC Cables faces
the heightened risk of a liquidity crunch in its operations vis-Ã -vis its
working capital needs, in view of its strained credit profile; any request to
PNB for financial support will require time to be approved.
We expect the Rating Watch to be
resolved within the next few months once there is clarity on the outcome of FEC
Cables’ proposed refinancing/restructuring exercise, which will involve the
early redemption of the outstanding Sukuk. All said, we have taken into
consideration PNB’s representation on the planned early redemption, and that it
will, until such time, continue to honour its undertakings to the Company as
outlined in the strongly-worded LoS. We will closely monitor developments
relating to the proposed refinancing/restructuring of the Sukuk. Should the
exercise not be completed within a reasonable time frame, the Sukuk’s ratings
will face downward pressure.
Independent of the LoS, FEC
Cables’ stand-alone credit profile is fragile, particularly with its
heavily-burdened balance sheet, tight liquidity and weak cash-generating
ability. Operational issues, i.e. production bottlenecks and escalating raw
material prices in FYE December 2011, had affected the Company’s
cash-generation significantly; its funds from operations (“FFO”) halved to
RM6.14 million during the period. At the same time, FEC Cables’ balance sheet
remained highly leveraged; its gearing ratio stood at 3.96 times, exacerbated
by eroding shareholders’ funds due to losses. This, coupled with its poor
cash-generating ability, places the Company in a vulnerable financial position.
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
Lee Sook Wei
(603) 7628 1017
