Business

Saturday February 4, 2012

MARC downgrades Perwaja notes


The outlook on the rating is negative, the agency said in a statement.

The rating action, which affects RM160mil of outstanding MMTNs under the programme, was premised on the prolonged decline in the steelmaker's operating performance and MARC's expectation of deterioration in its leverage and cash flow coverage credit metrics as a result of incremental debt to finance capital expenditure on an iron ore concentration and pelletising plant.

“While Perwaja's strategic initiative to integrate backwards into iron ore processing will likely contribute to better longer-term performance, MARC believes that the uncertain industry conditions and ongoing pressure on Perwaja's profitability will make it difficult for the steelmaker to improve its credit measures to a level commensurate with its previously assigned rating within the next 12 to 24 months.

“This view is reflected in the negative outlook that MARC is maintaining on the rating,'' it added.

The rating, it said, also reflected the company's vulnerability to decreases in upstream steel consumption and lower steel prices, domestic market revenue concentration and sensitivity to raw material price fluctuations.

This was evidenced by its lacklustre sales and reported losses for two consecutive years and the nine month period ending September 2011, MARC said.

The rating agency also acknowledged the financial support from Perwaja's ultimate holding company Kinsteel Bhd which, together with reduced working capital requirements at the steelmaker, had helped to limit the deterioration in the company's financial profile and allowed it to exhibit improved cash flow coverage measures in a challenging operating environment.

The rating outlook could revert to stable if Perwaja's operating performance improves over the coming quarters, and if it continues to retain an appropriate liquidity profile in addition to the ability to address its refinancing needs reasonably in advance.

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