KUALA LUMPUR (Feb 3): Malaysian Rating Corporation Bhd (MARC) lowered its rating on Perwaja Steel Sdn Bhd’s (Perwaja) RM400.0 million Murabahah medium term notes (MMTN) programme from AID to A-ID.
The rating agency said on Friday the rating action affected RM160 million of outstanding debt notes under the programme while the outlook on the rating was negative.
MARC said the rating action was due to the steelmaker’s prolonged decline in the operating performance.
The rating agency also expected a deterioration in Perwaja’s 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 would 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,” it said.
Hence, MARC said this view was reflected in the negative outlook that it was maintaining on the rating.
The rating reflected Perwaja’s vulnerability to decreases in upstream steel consumption and lower steel prices, its domestic market revenue concentration and its sensitivity to raw material price fluctuations, as evidenced by its lacklustre sales and reported losses for two consecutive years and the nine month period ending September 2011 (9MFY2011).
MARC also acknowledges the financial support from Perwaja’s ultimate holding company KINSTEEL BHD [], which together with reduced working capital requirements at the steelmaker, have helped to limit the deterioration in Perwaja’s financial profile and allowed the company to exhibit improved cash flow coverage measures in a challenging operating environment.
The rating agency said on Friday the rating action affected RM160 million of outstanding debt notes under the programme while the outlook on the rating was negative.
MARC said the rating action was due to the steelmaker’s prolonged decline in the operating performance.
The rating agency also expected a deterioration in Perwaja’s 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 would 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,” it said.
Hence, MARC said this view was reflected in the negative outlook that it was maintaining on the rating.
The rating reflected Perwaja’s vulnerability to decreases in upstream steel consumption and lower steel prices, its domestic market revenue concentration and its sensitivity to raw material price fluctuations, as evidenced by its lacklustre sales and reported losses for two consecutive years and the nine month period ending September 2011 (9MFY2011).
MARC also acknowledges the financial support from Perwaja’s ultimate holding company KINSTEEL BHD [], which together with reduced working capital requirements at the steelmaker, have helped to limit the deterioration in Perwaja’s financial profile and allowed the company to exhibit improved cash flow coverage measures in a challenging operating environment.
