MARC AFFIRMS ITS AAAIS(FG) RATING ON ANTARA STEEL MILLS SDN BHD’S RM300.0 MILLION SUKUK MUDHARABAH

MARC has affirmed its rating of AAA_IS(fg) on Antara Steel Mills Sdn Bhd’s (Antara) RM300.0 million Sukuk Mudharabah Programme with a stable outlook. The affirmed rating and outlook are underpinned by the unconditional and irrevocable financial guarantee provided by Danajamin Nasional Berhad (Danajamin) which carries MARC’s financial strength rating of AAA with a stable outlook.

Antara’s standalone credit profile has continued to be affected by the challenging operating environment for domestic steel players. As a consequence, Antara initiated extended plant shutdowns, which continued to result in low capacity utilisation rates. For the nine-month period ended March 31, 2015 (9MFY2015), the utilisation rate stood at 43.1% for its bars and billet plant in Pasir Gudang and at 61.0% for its hot briquetted iron (HBI) plant in Labuan. The utilisation rates remained unchanged from the preceding period.

For 9MFY2015, Antara’s unaudited revenue fell 7.7% year-on-year to RM819.2 million on weak demand and lower selling prices. Operating loss at its Pasir Gudang plant widened to RM35.5 million (9MFY2014: negative RM29.1 million), which was offset by the operating profit of RM43.7 million at the Labuan plant (9MFY2014: negative RM21.6 million). The Labuan plant’s operating profit reflects the absence of the impact from a 69-day shutdown in the previous year, arising from a vessel collision with the plant’s ship loader system. For 9MFY2015, Antara registered a pre-tax profit of RM24.5 million, partly supported by an insurance claim of RM24.1 million from the vessel collision.

MARC observes persistent outstanding of receivables from Antara’s related companies, in particular Megasteel Sdn Bhd (Megasteel) and Lion DRI Sdn Bhd (Lion DRI). At end-9MFY2015, outstanding receivables from them stood at a total of RM75.9 million, while about RM344.5 million of amount due from holding and related companies remains outstanding. The company had provided impairment losses of RM52.5 million on the receivables in FY2014. The rating agency views that any repayment delays from the related entities and/or further write-offs would erode Antara’s credit profile.

MARC remains concerned on the steelmaker’s ability to meet its sizeable payables, which stood at RM276.1 million as at end-9MFY2015 (end-FY2014: RM351.1 million). Cash flow generation was weak at RM0.4 million in the period. However, Antara’s leverage remained low with a debt-to-equity (DE) of 0.27 times in 9MFY2015 (end-FY2014: 0.27 times) with total borrowings consisting mostly of the outstanding rated sukuk of RM180.0 million following the scheduled principal repayment of RM60.0 million in June 2015. Antara would need to generate sufficient cash flows from operations to build up its depleting cash reserves to meet its forthcoming repayment of RM60.0 million under the rated sukuk in June 2016.

Noteholders are, however, insulated from the downside risks in relation to Antara’s credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Contacts: Ngiam Tee Wei, +603-2082 2268/ teewei@marc.com.my; Yap Lai Ken, +603-2082 2247/ laiken@marc.com.my.

September 29, 2015