Tuesday, April 5, 2011

RAM Ratings assigns long-term rating of BB2 to SYF Resources RM25.6m debt notes

KUALA LUMPUR: RAM Ratings has assigned a long-term rating of BB2 to SYF RESOURCES BHD []'s proposed RM25.68 million debt notes with a stable outlook.

The ratings agency said on Tuesday, April 5 the rating on the redeemable convertible secured loan stocks (2011/2016) (RCSLS), would also depend on the successful completion of SYF's proposed debt revamp.

SYF's subsidiaries are involved in the manufacture and sale of rubberwood products, including kiln-dried wood, finger-jointed strips and laminated boards, furniture components, dining and bedroom sets, as well as veneer-laminated, medium-density fibreboard.

RAM Ratings' head of consumer and industrial ratings Kevin Lim said the BB2 rating reflects the highly fragmented local furniture industry, characterised by low entry barriers, intense competition and low margins.

'The industry players' already-thin margins render them vulnerable to sudden spikes in input costs, given that most furniture producers have limited pricing flexibility to pass on higher costs to their customers,' he said.

Lim added that despite Malaysia being a major exporter of wooden furniture, the local industry faces intense competition from other low-cost producer countries such as China, Vietnam and Indonesia.

'We note that a large proportion of SYF's sales are exports denominated in US dollars'' which are a mismatch to its ringgit denominated costs. As such, the Group is exposed to foreign-exchange fluctuations; the substantial weakening of the greenback in the last 18 months has affected its revenue and earnings,' he added.

Meanwhile, the ratings also takes into consideration SYF's standing amongst the largest furniture manufacturers in Malaysia. The group's integrated operations provide scale economies in production, allowing it to attract stronger clients such as overseas furniture distributors, which impose stringent demands on product quality and timely delivery.

The RCSLS will be issued in conjunction with SYF's debt restructuring following its default on its debt obligations.

Prior to its default, the group had been suffering losses since FYE July 31, 2007, when two fires at its plant had disrupted its operations and earnings. It had also previously expanded into loss-making non-core businesses.

A sharp decline in demand from key markets in FY July 2009 had further aggravated its liquidity profile, causing SYF to default in May 2010.

'We note that the Group has since disposed of its non-core businesses. Upon completion of the proposed debt-restructuring scheme, SYF's debt load is expected to be trimmed from around RM104 million to some RM65 million,' he said.

Together with the issuance of RM21.01 million rights shares, the group's post-restructuring gearing ratio is projected to ease to about 0.7 times.

SYF's funds from operations (FFO) is also expected to improve in line with its post-restructuring turnaround plan, translating into an anticipated FFO debt cover of 0.2 times.

At the same time, the debt restructuring will see the entrance of a new substantial shareholder; SYF may derive synergies from the businesses of the new owner and implement more cost-saving initiatives.

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