RAM Ratings reaffirms rating of FEC Cables’ sukuk

Published on 21 November 2013

RAM Ratings has reaffirmed the A2(s)/Stable/- rating of FEC Cables (M) Sdn Bhd’s (the Company) RM130 million Islamic MTN Facility (2006/2019) (Sukuk). FEC Cables – a manufacturer of power and telecommunication cables – is 71.14%-owned by Permodalan Nasional Berhad (PNB), Malaysia’s largest state-owned fund-management company. The Company is the first of PNB’s 5 non-core assets to be identified for divestment to qualified Bumiputera companies, in line with the Government’s plan to encourage Bumiputera entrepreneurship.

The issue rating – notably enhanced beyond the Company’s stand-alone credit profile – incorporates the explicit support of PNB through a strongly worded Letter of Support (LoS). Short of a guarantee, the LoS states that PNB will ensure, either by equity, loans, grants and/or other means, that FEC Cables fully and promptly meets its financial obligations in respect of the Sukuk. 

“The A2(s) rating is specifically applicable to the Sukuk, and not an indication of FEC Cables’ overall credit risk. While incentive for PNB to support FEC Cables is considered weaker than before its divestment plans, PNB is still expected to back the Company, not only in relation to the Sukuk but also to financially support its day-to-day operations, if assistance is requested,” highlights Kevin Lim, RAM’s Head of Consumer & Industrial Ratings.

Given FEC Cables’ strained finances, our reaffirmation of the Sukuk’s rating places substantial weight on PNB’s representation to RAM that until the disposal of the Company is completed, it will continue to honour its undertakings to the Sukukholders as outlined in the LoS. We note that the key conditions precedent to the disposal include the concurrent refinancing of the outstanding Sukuk. To date, the divestment has not been finalised and progress has been slow on this front. PNB has indicated that the delay has been largely due to an impasse in negotiations with an earlier short-listed bidder; it has had to seek alternative offers and repeat the evaluation process.

Independent of the LoS, FEC Cables’ stand-alone credit profile is very fragile, with heavily burdened balance sheet, tight liquidity and weak cash-generating ability. Despite better sales, poorer margins led to a pre-tax loss of RM14.85 million in FY Dec 2012. The Company’s losses had continued to erode its equity base and had further undermined its balance sheet, leaving it in a precarious position; its net gearing ratio had weakened to 6.94 times by end-FY Dec 2012, before deteriorating further to 10.13 times as at end-1H FY Dec 2013. Moreover, its yearly funds from operations are not expected to cover its annual finance expenses of about RM10 million. If FEC Cables’ performance does not improve, it is likely to become technically insolvent within a year.

Operationally, FEC Cables’ manufacturing plants lack economies of scale and efficiency as they operate below a utilisation rate of 80%. Without the benefit of scale, costs are envisaged to remain high, thus compressing its margins. Disruptions to its operations had further impeded its productivity in 2011. Since then, however, the operational issues have been mostly resolved; the overall utilisation rate of the Company’s plants improved from 45% to 63% y-o-y in 2012. In 1H FY Dec 2013, the overall utilisation rate stood at 56% while outsourcing activities had also been reduced to 10% of its total sales.

With raw materials, in particular copper and aluminium, accounted for the bulk of FEC Cables’ cost of sales, it must manage its exposure to price volatility amid a keenly competitive industry, where customers wield significant bargaining power. That said, FEC Cables continues to enjoy substantial financial flexibility derived from its parent; in the last 2 years, PNB has stepped in to subscribe for the Company’s redeemable cumulative preference shares and also provided advances to support it.

Media contact

Lee Sook Wei

(603) 7628 1017

sookwei@ram.com.my