RAM Ratings downgrades ratings of Bernas’ sukuk

Published on 04 June 2015

RAM Ratings has downgraded the ratings of Padiberas Nasional Berhad’s (Bernas or the Group) RM750 million Islamic Commercial Papers/Medium-Term Notes Programme (ICP/MTN) (2010/2017) to A3/negative/P2 from AA3/negative/P1.

The downgrade reflects the material and unexpected deterioration in Bernas’ financial profile arising from the extension of financial support to its parent, Tradewinds (M) Berhad (TWM), as well as several adverse industry developments. 

After the delisting of Bernas in April 2014, the Group had channelled large amount of advances to its holding companies and related parties totalling over RM700 million. “Support of this nature and magnitude is not within RAM’s expectation and such a move implies increased influence and explicit control of TWM. In our last rating review, we had cautioned that any increased financial support for TWM would put pressure on Bernas’ credit ratings, and had maintained the outlook on the long-term rating of the ICP/MTN at negative,” notes Kevin Lim, RAM’s Head of Consumer and Industrial Ratings.

“At the same time, Bernas’ operational performance also suffered in FY Dec 2014, with unforeseen setbacks in both its local and imported rice businesses. This, combined with the extension of advances, had markedly weakened the Group’s financial metrics and exerted significant pressure on its liquidity,” adds Lim. As at end-December 2014, the Group’s gearing and net gearing ratios stood at a respective 1.41 and 1.19 times – considerably higher than our projections of around 0.7 times and 0.5 times. Further, Bernas’ funds from operations debt cover (FFODC) had thinned to 0.09 times – again significantly below our expectation of 0.26 times.

The negative outlook reflects our concerns over additional shareholder-friendly manoeuvres and operational challenges that would further compromise Bernas’ financial profile. Although new advances to shareholders/related parties are unlikely, the Group has committed to future dividend payouts (from fiscal 2015 onwards) that are much higher than the Group’s net earnings.

The rating outlook may revert to stable if Bernas demonstrates sustainable improvements in its operational performance and support for TWM abates to a level that no longer strains its credit profile. Conversely, Bernas’ ratings will be downgraded if its liquidity or credit metrics deteriorate beyond our expectations. This could arise on the back of greater financial support for its parent, or if Bernas fails to stabilise its operating performance.

We had previously expected Bernas to gradually pare down its debts following the collection of delayed subsidy receivables from the Government of Malaysia in 2014. On the contrary, the Group’s debt level had increased 20.0% to nearly RM2 billion (end-December 2013: RM1.64 billion). Besides advances, Bernas had also taken on additional trade lines to fund its heftier working-capital needs. Given the expected erosion of its equity base (from outsized dividend payments) and the absence of any improvement in its profitability, the Group’s gearing ratio could reach 1.8 times by FY Dec 2016 while its FFODC will likely stay below 0.10 times.

Apart from its leveraged balance sheet and modest cashflow-protection metrics, the Group’s liquidity profile is deemed weak. As at end-December 2014, the Group’s cash to short-term debt coverage had deteriorated to just 0.18 times (end-December 2013: 0.80 times) – the ratio remains well below 1 time even after including unutilised trade facilities. Meanwhile, Bernas’ RM400 million of outstanding MTN will become due in September 2015. We understand that the MTN is expected to be repaid via internal funds and/or potential partial repayment of advances from TWM prior to the maturity of the facility.

Bernas’ credit profile is further moderated by its loss-making milling operations – a situation that has been exacerbated by the hike in the purchase price of paddy since March 2014. Some private millers had, as a result, not been able to operate commercially and had, therefore, reduced their procurement of paddy. This had left Bernas with excess paddy supply, triggering an unexpected increase in its working capital of around RM250 million and significant rice-milling losses of about RM56 million in FY Dec 2014 (FY Dec 2013: losses of RM6 million). Additionally, Bernas is exposed to regulatory risk as well as swings in international rice prices.

All said, Bernas’ credit profile remains supported by its monopoly over the importation of rice in Malaysia and its strategic role within the highly-regulated domestic rice industry. The Group receives subsidy payments under the Government Subsidy Rice (GSR) scheme, as compensation for selling certain rice grades at regulated prices. Meanwhile, Bernas’ obligations include maintaining the national rice stockpile and disbursing government subsidies to paddy farmers. The Group also acts as the buyer of last resort of local paddy, and ensures fair and stable rice prices.

Media contact

Amy Lo

(603) 7628 1078

amy@ram.com.my