MARC DOWNGRADES KNM CAPITAL SDN BHD’S DEBT RATINGS TO MARC-2ID /A-ID ; MAINTAINS MARCWATCH NEGATIVE

Jul 24, 2013 -

MARC has lowered its debt ratings on KNM Capital Sdn Bhd’s (KNM Capital) RM300 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/IMTN) Programme to MARC-2ID/A-ID from MARC-1ID/A+ID. The ratings continue to be maintained on MARCWatch Negative. The rating action affects RM50 million of outstanding notes. KNM Capital is a wholly-owned funding vehicle of KNM Group Bhd (KNM) that was established to issue the MUNIF/IMTN programme.

The lowered ratings reflect tight liquidity at KNM, as evidenced by its financial covenant breach under the rated notes, and KNM Capital’s dependence on timely refinancing of outstanding notes under the rated programme as the ultimate source of repayment for the notes. KNM had breached its minimum financial service cover ratio (FSCR) of 1.5 times (x) for the financial year ended December 2012. KNM Capital noteholders granted indulgence to KNM Capital and KNM for the non-compliance of the FSCR until June 30, 2013 subject to the fulfilment of certain conditions, including the placement of RM50 million into its Finance Service Account (FSA) by June 30, 2013.

Subsequent to obtaining noteholders’ indulgence on the financial covenant breach, KNM Capital rolled over RM15 million of its outstanding notes on their July maturity date contrary to MARC’s earlier expectations of a debt paydown. Additionally, KNM Capital recently sought to defer its placement of RM50 million in its FSA by June 30, 2013 until the end of the notes programme on October 18, 2013 or upon completion of its planned refinancing of the notes, whichever is earlier. MARC observes that noteholders have only consented to a deferment of its placement of RM50 million into the FSA until August 30, 2013 or upon completion of its refinancing scheme, whichever is earlier. Nonetheless, the rating agency understands from KNM Capital that it has finalised the terms of the loan facilities with two banks for the refinancing of the outstanding notes of RM50 million and that it expects to complete its planned refinancing by end-August 2013 pending approval of the facilities.

KNM’s liquidity profile remains tight at holding company level; most of the Group’s cash holdings are with its foreign subsidiaries and KNM’s access to these cash holdings is affected by multiple considerations including the financing arrangements of its subsidiaries. The collective cash holdings of KNM’s domestic subsidiaries and internal cash flow generation are expected to be insufficient to address KNM Capital’s upcoming debt maturities in full, partly due to the meaningful working capital requirements at these entities. Intercompany transfers from foreign subsidiaries could provide some financial flexibility, however MARC is mindful that the timing of such transfers is subject to significant uncertainty. 

The continuing MARCWatch Negative placement incorporates the event risk associated with the timely refinancing of the notes. If the refinancing does not take place by end-August 2013 and no alternative source of repayment for the notes is identified, the ratings could be lowered further.

Contacts:

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;

Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my.