MARC REMOVES MAXTRAL INDUSTRY BERHAD'S RATINGS FROM MARCWATCH NEGATIVE; DOWNGRADES TO BBB+ID AND MARC-3ID/BBB+ID

MARC (May 25, 2011): MARC has downgraded its ratings on Maxtral Industry Berhad's (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20.0 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities to BBB+ID and MARC-3ID/BBB+ID from AID and MARC-2ID/AID respectively. Concurrently, the ratings have been removed from MARCWatch Negative where they were first placed on November 26, 2010. The rating action affects RM20.0 million of BaIDS outstanding under the RM80.0 million BaIDS programme and RM20.0 million of notes issued under the MUNIF/MMTN programme. The rating downgrades reflect Maxtral’s weak liquidity and continuing weak operating performance.

Since MARC’s last rating update in February 2011, the company has met its RM20.0 million BaIDS repayment on April 13, 2011 with proceeds from a bank term loan. The next BaIDS repayment of RM20.0 million is due on April 13, 2012. The timber and timber products company faces moderate refinancing risk in respect of the RM20.0 million April 2012 BaIDS repayment. MARC has been informed that the company plans to meet its remaining obligations under the rated programmes with proceeds from a syndicated loan.

Maxtral’s vulnerability to prolonged shortages in log supply, fluctuating demand for timber and timber products as well as USD/Ringgit exchange rate exposures weighed on its operating performance in 2010 and in the first quarter of 2011. For the financial year ended December 31, 2010 (FY2010), the company posted a pre-tax loss of RM11.99 million compared to pre-tax profit of RM6.5 million the previous year against a revenue base which declined sharply by 69.4% to RM61.5 million (FY2009: RM200.7 million). In the first quarter of 2011, Maxtral’s quarterly pre-tax losses widened to RM4.2 million (Q1FY2010: pre-tax loss of RM3.4 million) on revenue of RM8.3 million (Q1FY2010: RM27.5 million). Maxtral has short-term debt of RM40.8 million as of May 24, 2011 but only unencumbered cash and bank balances of RM0.7 million. Cash flows have been significantly affected by the harsh trading conditions, and Maxtral’s strategy is to extend its debt maturity profile by replacing its BaIDS with new long-term financing.

The company is operating at only 20% of its installed capacity, and MARC understands from Maxtral that a recovery in trading volumes is likely in the near term given the improved demand prospects and recently secured access to log supplies until 2013. However, this is unlikely to lead to a significant improvement in its financial metrics over the next 12 to 18 months.

The stable outlook on the lowered ratings assumes that Maxtral will be able stabilise its operating margins over the next several quarters in line with an expected pick-up in its trading volumes. MARC also expects Maxtral to make meaningful progress in its refinancing plan ahead of its 2012 BaIDS repayment. MARC could revise the outlook and/or the ratings if there are any material setbacks in Maxtral’s refinancing plan or the anticipated pick-up in its trading volumes fails to materialise.

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