RAM Ratings reaffirms FEC Cables’ issue rating

Published on 29 September 2014

RAM Ratings has reaffirmed the A2(s)/Stable rating of FEC Cables (M) Sdn Bhd’s (the Company) RM130 million Islamic Medium-Term Notes 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 issue rating – significantly enhanced beyond the Company’s stand-alone credit profile – incorporates PNB’s explicit support as stipulated in 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 is not an indication of FEC Cables’ overall credit risk. While the incentive for PNB to support FEC Cables is considered weaker following PNB’s intention to divest FEC Cables, PNB is still expected to back the Company, not only in relation to the Sukuk, but also to provide financial support for its day-to-day operations, if requested,” highlights Kevin Lim, RAM’s Head of Consumer & Industrial Ratings. In all redemptions relating to the Sukuk to date, PNB has stepped in to support the Company via advances and subscription of the latter’s redeemable cumulative preference shares.

“Given FEC Cables’ strained finances, our reaffirmation of the Sukuk’s rating places substantial weight on PNB’s representation that until the disposal of the Company is completed, it will continue to honour its undertakings to the Sukuk holders as outlined in the LoS,” adds Lim. A Sales and Purchase of Shares Agreement (SSA) was signed in May 2014, and the divestment is expected to be completed by the end of the year. Among the conditions precedent in the SSA is the early redemption/concurrent refinancing of the outstanding Sukuk.

Independent of the LoS, FEC Cables’ stand-alone credit profile is very fragile. The Company’s losses in the last 3 years have wiped out its entire shareholder equity. FEC Cables’ cash-generating ability in FY Dec 2013 was affected by a 26.1% y-o-y decline in sales on low demand from Tenaga Nasional Berhad, the national power company. Without the benefit of scale, overall costs remained hefty while selling prices stayed pressured in an inherently competitive industry. FEC Cables’ yearly funds from operations remained insufficient to cover its annual finance expenses of about RM10 million. “Without PNB’s support, we believe it is very unlikely that the Company will remain a going concern,” says Lim.

Media contact

Evelyn Khoo

(603) 7628 1075

evelyn@ram.com.my