RAM Ratings downgrades ratings of FEC Cables’ sukuk; Negative Watch lifted

Published on 11 April 2013

RAM Ratings has downgraded FEC Cables (M) Sdn Bhd’s (“FEC Cables” or “the Company”) debt facilities (collectively known as “the Sukuk”), as follows:

i)         The enhanced long-term rating of its RM130 million Islamic Medium-Term

            Notes Facility (2006/2019) from AA2(s) to A2(s);

ii)        The enhanced short-term rating of its RM20 million Murabahah Underwritten Notes

            Issuance Facility (2006/2013) from P1(s) to P2(s).

Concurrently, we have lifted the Negative Rating Watch on the Sukuk and the outlook on the long-term rating has reverted to stable. The Negative Watch on the ratings had been prompted by Permodalan Nasional Berhad’s (“PNB”) announcement of its planned divestment of the Company on 31 May 2012. FEC Cables, a telecommunication cables manufacturer, is the first of PNB’s 5 non-core assets to be divested to qualified Bumiputera companies. It is 71.14%-owned by PNB, Malaysia’s largest state-owned fund management company.

The rating downgrades are premised on our view that the incentive for PNB to support FEC Cables is no longer at the level it was previously, given PNB’s clear intention to divest the Company; we also note that a prospective new owner has been identified. In arriving at the Sukuk’s previous enhanced ratings of AA2(s) and P1(s), RAM had given substantial benefit to the parent-subsidiary relationship as well as the explicit support from PNB through a strongly-worded Letter of Support (“LoS”). Provided to the Trustee of the Sukuk, the LoS states that PNB will ensure – either by equity, loans, grants and/or other means – that FEC Cables meets its financial obligations in respect of the Sukuk in a full and timely manner.

Nonetheless, we have taken into consideration PNB’s representation to us that until the disposal of FEC Cables is completed, likely by December 2013, it will continue to honour its undertakings to the Company as outlined in the LoS. Among the key conditions precedent to the disposal is the concurrent refinancing of the outstanding Sukuk. As such, we have maintained the ratings at levels notably higher than that consistent with FEC Cables’ stand-alone credit profile.

“The A2(s)/P2(s) ratings are specific and applicable only to the Sukuk, and are not an assessment of FEC Cables’ overall credit risk. Based on the LoS, PNB is envisaged to continue to provide the Company with financial assistance should the need arise, albeit at a lesser degree of certainty, so long as the Sukuk remains outstanding and PNB remains the majority shareholder of the Company,” highlights Kevin Lim, RAM’s Head of Consumer & Industrial Ratings.

Upon the full repayment of the outstanding Sukuk, PNB shall, with the consent of the Sukuk holders, be unconditionally discharged from its obligations under the LoS. We highlight that in the event PNB’s shareholding in the Company drops to 50% or less, it would be tantamount to an event of default, and the outstanding Sukuk will become immediately due and payable. On this front, we will closely monitor developments relating to the divestment and review the final transaction documents once available.

Media contact

Lee Sook Wei

(603) 7628 1017

sookwei@ram.com.my