MARC affirms Antara Steel sukuk at ‘AAA’

PETALING JAYA: Malaysian Rating Corp Bhd (MARC) has affirmed its “AAA” rating on Antara Steel Mills Sdn Bhd’s (Antara), a member of the Lion Group, RM300 million Sukuk Mudharabah programme with a stable outlook.

In a statement last Friday, MARC said the affirmed rating and outlook are underpinned by the unconditional and irrevocable financial guarantee provided by Danajamin Nasional Bhd (Danajamin), which carries a financial insurer strength rating of AAA/stable from the rating agency.

However, MARC said Antara’s standalone credit profile remained weak amidst challenging conditions for the domestic steel industry characterised by excess supply and cheaper steel imports from China.

The rating agency said these factors have impeded local steel producers from benefiting from improved demand driven by an increase in infrastructure activity.

In addition, MARC said the steel products manufacturer has sizeable unpaid receivables due from two related companies, namely Megasteel Sdn Bhd (Megasteel) and Lion DRI Sdn Bhd (Lion DRI).

MARC said it views that the collection of receivables from Megasteel and Lion DRI totalling RM74.1 million as at June 30, 2015 (FY15) will be protracted pending debt restructuring negotiations following their debt defaults last year and the temporary cessation of operations at Megasteel plant early this year.

Furthermore, MARC said Antara also suffered significant lower sales, where it shut down the hot briquetted iron plant in Labuan for 37 days on top of a 63-day closure for maintenance work in 9MFY16 in order to minimise further losses.

With no significant recovery in the steel industry expected in the near term, MARC said it anticipates the weakness in Antara’s operating performance to continue.

MARC said the company’s liquidity remains very tight with limited financial flexibility, and it continues to rely on cash flows generated from operations to meet short-term obligations.

“Noteholders are nonetheless, insulated from the downside risks in relation to Antara’s credit profile by 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,” it added.

Antara made a repayment of RM60 million under the rated programme on June 28, 2016. Its current outstanding amount under the programme is RM120 million, of which RM60 million each is due on June 29, 2017 and June 28, 2018.