RAM Ratings has reaffirmed the respective long- and short-term ratings of Padiberas Nasional Berhad’s (“Bernas” or “the Group”) RM750 million Islamic Commercial Papers/Medium-Term Notes Programme (2010/2017) (“ICP/MTN”) at AA3 and P1

RAM Ratings has reaffirmed the respective long- and short-term ratings of Padiberas Nasional Berhad’s (“Bernas” or “the Group”) RM750 million Islamic Commercial Papers/Medium-Term Notes Programme (2010/2017) (“ICP/MTN”) at AA3 and P1. At the same time, the outlook on the long-term rating has been revised to negative from stable. Bernas is involved in the importation of rice, trading in local and imported rice, and rice milling. The Group’s activities are essentially the commercial and social roles it has taken over from Lembaga Padi dan Beras Negara. The Government of Malaysia (“GoM”) retains all regulatory functions within the domestic rice industry.
On 24 December 2012, Bernas and its parent company, Tradewinds (M) Berhad (“TWM”), had announced the proposed privatisation of the latter, initiated by various companies mostly held by Tan Sri Dato’ Seri Syed Mokhtar Al-Bukhary (“joint offerors”). The joint offerors’ securing of more than 90% of shares that they did not already own in TWM, triggered mandatory takeover offers for Bernas and its sister company, Tradewinds Plantation Berhad (“TWP”), on 28 February 2013. The privatisation of TWM, TWP and Bernas, which is estimated to entail around RM2.5 billion, is mainly debt-funded. The privatisation of TWP materialised on 25 April 2013, after the joint offerors secured 98.63% of shares in the former. However, the privatisation of Bernas fell through as the joint offerors had only managed to acquire up to 83.67% of the Group on 20 May 2013, the closing date of the takeover offer.
In FY Dec 2012, Bernas’s balance sheet remained leveraged, with an adjusted gearing ratio of 1.14 times. As such, the Group’s adjusted gearing ratio for the last 2 years was weaker than our expectation of under 1 time. Meanwhile, the Group’s funds from operations debt cover (“FFODC”) was at the lower end of our envisaged range, although the ratio met our expectations.
The rating outlook has been revised to negative from stable as Bernas’s cashflow-debt coverage has been on a downtrend in the last 3 years amid weakening operating performance and rising debt level. The Group’s debt load had been substantial as additional trade lines were drawn to fund its rice and paddy purchases, and to a lesser extent, delayed receivables from the GoM. Bernas had also paid out the bulk of its profit after tax as dividends, thereby impeding equity growth. The Group’s FFODC had fallen from 0.23 times as at end-FY Dec 2010 to 0.15 times as at end-FY Dec 2012, while its adjusted gearing ratio had deteriorated from 0.81 times as at end-FY Dec 2010 to 1.14 times as at end-FY Dec 2012. While the Group’s annualised FFODC came in at 0.20 times (based on 1Q FY Dec 2013 results) amid higher operating efficiency, its gearing ratio remains elevated at 1.15 times, as at end-March 2013.
“Looking ahead, Bernas’s financial profile may weaken should its receivables and inventory levels not ease, which would hinder the paring down of its debt level. In addition, the Group could take on more debt to fund a potentially larger dividend payout, given heightened pressure from its parent to flow up funds to support the latter’s acquisition-related debt,” notes Kevin Lim, RAM’s Head of Consumer & Industrial Ratings. The ratings will be downgraded if Bernas’s receivables and inventory balances remain high, which will deter the Group from reducing its debt and adjusted gearing ratio to their previous levels of around RM1 billion and under 1 time, respectively, and sustainably improving its FFODC to 0.20 times. Conversely, the rating outlook may revert to stable if the Group is able to reduce its debt level and improve its financial profile.
Despite the above challenges, the ratings recognise Bernas’s position as the sole licensed importer of rice into Malaysia, its strategic role within the regulated domestic rice sector, stable demand for rice, and the Group’s adequate cashflow-generating ability. However, the ratings are moderated by the Group’s exposure to fluctuations in international rice prices and supply risk, its loss-making milling operations, the risk of non-renewal of its import licence as well as uncertainties arising from the debt-funded privatisation exercise initiated by its ultimate controlling shareholder.
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Juliana Koay
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