RAM Ratings has reaffirmed the A2(s)/Stable rating of FEC Cables (M) Sdn Bhd’s (FEC Cables or the Company) RM130 million Islamic Medium-Term Notes Facility (2006/2019) (the Sukuk). FEC Cables – a manufacturer of power and telecommunication cables – is majority-owned by Permodalan Nasional Berhad (PNB).

Published on 17 November 2015

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. 
Given FEC Cables’ strained finances, our reaffirmation of the rating places substantial weight on PNB’s representation to RAM that it will continue to honour its undertakings to the sukuk holders, as outlined in the LoS. We note that FEC Cables had been identified as one of the companies that would be divested under the Unit Peneraju Agenda Bumiputera (TERAJU) programme. Since our last review, the planned divestment of FEC Cables, which had been expected to be completed by end-2014, had fallen through, with PNB still holding a 71.14% stake in the Company. Nevertheless, despite the setback, PNB will continue to evaluate any proposal relating to the Company.
We highlight that the A2(s) rating is specifically applicable to the Sukuk and is not an indication of FEC Cables’ overall credit risk. While we view PNB’s incentive to support the Company as weaker than it was prior to the former’s plan to divest the Company, PNB is still expected to back the Company, not only in ensuring it meets its obligations under the Sukuk, but also in respect of its day-to-day operations, if required. As such, FEC Cables continues to derive substantial financial flexibility from PNB. In all redemptions of the Sukuk to date, PNB has stepped in to support the Company via advances and subscription of the latter’s redeemable cumulative preference shares.  
Independent of the LoS, FEC Cables’ stand-alone credit profile is very fragile, characterised by a heavily-burdened balance sheet and weak cash-generating ability. Although the Company’s total equity had returned to positive territory, FEC Cables’ balance sheet stayed highly leveraged, with an adjusted gearing ratio of 4.65 times as at end-December 2014. Furthermore, the Company’s cash-generating ability remained affected by a steep decline in sales on low demand from Tenaga Nasional Berhad. In FY Dec 2014, FEC Cables’ revenue fell 34.1% y-o-y to RM76.02 million, resulting in an operating loss before depreciation, interest and tax of RM5.07 million.

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Chan Yisze
(603) 7628 1111
yisze@ram.com.my