MARC DOWNGRADES PERWAJA STEEL SDN BHD’S ISLAMIC DEBT RATING TO BBID; MAINTAINS RATING ON MARCWATCH NEGATIVE

Jul 5, 2013 -

MARC has downgraded its rating on Perwaja Steel Sdn Bhd’s (Perwaja) RM400.0 million Murabahah Medium Term Notes (MMTN) programme to BBID from BBB-ID. In addition, the rating remains on MARCWatch Negative where it was placed on April 17, 2013. The rating downgrade and MARCWatch Negative placement reflects near-term liquidity concerns, poor operating performance and a significantly weaker financial profile.

Prospects for improvement in the steelmaker’s financial flexibility and liquidity position remain weak in light of the prevailing challenging conditions in the steel sector and recent High Court order directing Perwaja to fully settle its gas bill arrears of RM146.1 million with Petroliam Nasional Berhad (Petronas). Unless the steelmaker can find a way to address its gas bill arrears, it faces an increased risk of a gas shut-off in addition to heightened going concern risks. MARC believes there is an identifiable risk of default in the near term associated with the steelmaker’s upcoming RM50 million repayment on its outstanding RM110 million MMTN.

Perwaja has an onerous debt burden and continues to incur sizeable finance costs. MARC is of the view that Perwaja will be challenged to build up its Finance Service Reserve Account to 50% of its upcoming principal payment three months prior to the redemption date without access to additional sources of funding. The amount and timing of any potential cash inflows remain uncertain and are of growing concern given Perwaja and its parent’s low level of liquidity relative to current obligations, as implied by the consolidated financial statements prepared at intermediate holding company Perwaja Holdings Berhad (PHB). The group’s consolidated cash and cash equivalents as at end-March 2013 stood at RM12.7 million, down from RM27.8 million at year end 2012.

Based on the aforementioned financial statements, the group posted a pre-tax loss of RM18.5 million for the first three months of 2013. Revenue and profitability have been adversely affected by falling demand and slumping steel prices. Meanwhile, PHB’s total debt rose to RM1,323.7 million as at end-March 2013 (end-December 2012: RM1,255.3 million), of which overdrafts and short-term borrowings accounted for RM985.5 million as of the same date. Adding to concerns about Perwaja’s debt serving capacity and financial performance is the High Court decision on June 13, 2013 pertaining to its Terengganu steel plant’s large arrears on its gas bill. MARC understands that Perwaja has appealed against the High Court decision.

MARC will monitor the steps that Perwaja is taking to address its operating and liquidity challenges, including its upcoming debt maturity in September. The MARCWatch Negative placement incorporates the possibility that the rating could be lowered further if these efforts fail to address its liquidity issues and heightened default risk by end-August 2013.

Contacts:

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

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

Rajan Paramesran, +603-2083 2233/ rajan@marc.com.my.