MARC DOWNGRADES ITS RATINGS ON KINSTEEL BERHAD’S RM200 MILLION ISLAMIC DEBT PROGRAMMES TO MARC-4ID/BB+ID; PLACES RATINGS ON MARCWATCH NEGATIVE

Jul 15, 2013 -

MARC has downgraded its ratings on Kinsteel Berhad’s (Kinsteel) RM100.0 million Murabahah Commercial Papers/Medium Term Notes (CP/MTN) Programme and RM100.0 million Murabahah Medium Term Notes (MTN) Programme to MARC-4ID/BB+ID and BB+ID from MARC-3ID/BBBID and BBBID respectively. Concurrently, the ratings have been placed on MARCWatch Negative. The rating downgrades and MARCWatch placement reflect MARC’s concern over Kinsteel’s limited liquidity and heightened refinancing risk associated with its upcoming CP/MTN and MTN maturities. Refinancing risk has increased as its August CP/MTN and September MTN maturities of RM40.0 million and RM10.0 million respectively draw closer. Kinsteel’s recent weak operating results stemming from a continuing period of difficult steel market conditions and the prospect of continued weak financial performance are expected to pose meaningful constraints to its financial flexibility.

Kinsteel has RM40.0 million notes issued under its CP/MTN programme maturing on August 28, 2013 and RM10.0 million of MTN maturing on September 6, 2013. MARC notes that the company is required to fully fund its Finance Service Reserve Account (FSRA) requirements for its August RM40.0 million CP/MTN maturity by July 28, 2013 and 50% of its outstanding RM10.0 million MTN maturity in September 2013. However, the rating agency understands that Kinsteel has not complied with the requirement to build up its FSRA by RM5.0 million in respect of its MTN by July 6, 2013. This development heightens concerns over the Kinsteel Group’s ability to meet its upcoming financial obligations on the CP/MTN and MTN on the redemption dates.

Additionally, Kinsteel’s subsidiary Perwaja Steel Sdn Bhd (Perwaja) has to meet a RM50.0 million repayment on September 25, 2013 on its RM110.0 million outstanding Murabahah Medium Term Notes (MMTN). In the past, Perwaja had relied on its parent’s support for its debt repayment and working capital requirements. The rating on Perwaja’s MMTN has been on MARCWatch Negative since April 17, 2013.

Given Kinsteel’s recent weak operating performance, which continues to be affected by the prevailing tough operating environment for the steel sector and the group’s sizeable debt, MARC is of the view that the Kinsteel Group faces challenges in generating sufficient liquidity to meet its current obligations without relying on external funding. The group registered lower revenue and operating profit of RM410.1 million and RM7.6 million for the first quarter ended March 31, 2013 (1QFY2013) from the RM506.1 million and RM48.6 million recorded in the corresponding quarter last year. The weak operating performance was compounded by high finance costs of RM31.4 million, resulting in a pre-tax loss of RM23.8 million in 1QFY2013. MARC also notes that group debt rose to RM1.97 billion at end-March 2013 from RM1.88 billion at end-2012. At the company level, Kinsteel’s debt stood at RM658.5 million while cash and bank balances were modest at RM9.6 million at end-December 2012.

The MARCWatch Negative placement highlights that the ratings could be lowered further should Kinsteel fail to make any meaningful progress to address its near-term liquidity risks.    

Contacts:

Ngiam Tee Wei, +603-2082 2268/ teewei@marc.com.my;

Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my;

Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.