Monday 26th November 2012
Wednesday, November 28, 2012
Published on 26 November 2012
RAM Ratings has assigned a preliminary AA3/Stable/- rating to RHB Investment Bank Berhad’s (“RHB Investment” or “the Bank”) Proposed Subordinated Notes of up to RM245 million. Concurrently, we have reaffirmed the Bank’s AA2/Stable/P1 financial institution ratings and also the AA3/Stable/- rating of the debt securities issued under its existing RM245 million Subordinated Notes Programme. The Bank’s financial institution ratings mirror those of RHB Bank Berhad (“RHB Bank”) – the core entity of RHB Capital Berhad. Given RHB Investment’s integral role within the larger universal-banking group, support from RHB Capital Group is expected to be forthcoming, if needed.
RHB Investment is a prominent player within the Malaysian investment-banking arena with an established franchise in both the domestic debt and equity capital markets. On this note, the proposed merger between the Bank and OSK Investment Bank Berhad (“OSK Investment”, rated A1/Stable/P1 by RAM Ratings) will create the largest domestic stockbroker in the country. Besides leveraging on OSK Investment’s niche in arranging small- to mid-market deals, RHB Investment will also gain instant access to the former’s regional markets in Thailand, Singapore, Indonesia, Hong Kong, China and Cambodia for cross-border transactions. While recognising the benefits of a regional investment-banking franchise and income diversity, we note that integration challenges may arise, particularly in terms of human-capital retention and cultural differences.
The Bank’s earnings profile is inherently volatile given its substantial involvement in capital markets and stockbroking, which are closely correlated to market conditions and sentiment. In FYE 31 December 2011 (“FY Dec 2011”), RHB Investment recorded a pre-tax profit of only RM37.9 million (FY Dec 2010: RM89.5 million), mainly due to weaker net interest income and RM35.8 million of impairment losses on investments. Nonetheless, the Bank’s pre-tax profit improved to RM48.6 million in 1H FY Dec 2012, following a pick-up in its investment-banking activities. As at end-June 2012, its tier-1 and overall risk-weighted capital-adequacy ratios stood at a robust 24.3% and 34.8%, respectively.
(603) 7628 1115
Tuesday, November 27, 2012
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-à-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-à-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.
Lee Sook Wei
(603) 7628 1017