Delay in MTD Walkers rating downgrade disclosure hints firm’s debt repayment challenge

MTD Walkers PLC was queried by the Colombo Stock Exchange (CSE) last week over the firm’s ability and measures taken to retire a substantial part of its debenture maturing by the end of this month, after the company failed to disclose its rating downgrade.

Civil engineering juggernaut, which made inroads into marine engineering and real estate recently, was downgraded to the junk status this May but the company failed to disclose of its rating action until the CSE made queries.

Disclosing its rating actions, the company said it incorrectly assumed that the availability of the rating online at the rating agency’s website would be adequate and added that they would ensure all future rating actions are released to the CSE going forward.

On May 30, ICRA Lanka Limited downgraded MTD Walkers and its Rs.3.0 billion debentures issued in 2015 September to ‘BB-’ from ‘BB+’, with a Negative Outlook, due to the firm’s deteriorating profitability and increasing debt. Out of the Rs.3.0 billion debentures, Rs.2.1 billion of Type A debentures are waiting for retirement on September 30 and the balance under Type B, two years later.

As the company has been losing money and became over-leveraged due to the borrowings made to fund its significant working capital needs, there is an uncertainty over the firm’s ability to meet its near-term obligations.

“The company is making every endeavour to meet its obligations as per the debenture trust deed,” MTD Walkers said in response to the CSE’S letter dated September 19, on the matter. MTD Walkers is a leading contractor of statefunded infrastructure projects such as roads, highways and housing projects but the payment delays have caused the group to borrow for its working capital.

The company has already handed over three Urban Development Authority housing development projects, which were financed on a deferred contractor financing model and the total receivables from these three projects stand at Rs.5.6 billion. The total receivables to MTD Walkers as of June 30, 2018 stood at Rs.23 billion and the company has Rs.29 billion in total outstanding borrowings. ICRA measured the MTD Walkers group’s gearing at 4.9 times by enddecember 2017, from 2.5 times and 1.7 times in financial years 2017 and 2016, respectively.

Last December, the piling work of the Central Expressway State II, spanning from Meerigama to Kurunegala—mtd Walkers’ largest construction project to date—was handed over to the company.

Meanwhile, the group lost Rs.3.2 billion during the financial year ended March 2018, due to tougher operating conditions characterized by a slowdown in construction and infrastructure activities, excessively higher operating costs and rising finance costs. The average cost of steel, sand and labour, which makes up 90 percent of construction cost, has increased by a considerable 25 percent during 2017, said MTD Walkers Group Executive Deputy Chairman Jehan Amaratunga. During the quarter ended June 30, the group’s net finance cost almost doubled to Rs.990.2 million.

For the quarter ended June 30, 2018 (1Q19), the company lost Rs.624.1 million or Rs.3.72 a share, compared to Rs. 546.1 million or Rs.3.26 loss per share in the same period, last year.

Malaysia’s MTD Capital Bhd holds a 90.78 percent stake in MTD Walkers PLC.