RAM Ratings puts FEC Cables’ Sukuk ratings on Negative Watch

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.

Media contact

Lee Sook Wei

(603) 7628 1017

sookwei@ram.com.my