Saturday, November 19, 2011

RAM Ratings downgrades Texchem debt notes, negative outlook

KUALA LUMPUR (Nov 19): RAM Ratings has downgraded the long-term rating of TEXCHEM RESOURCES BHD []'s RM100 million debt notes from A3 to BBB1 with a negative outlook on rising concerns about the outlook for the company's weakening financial performance.

The ratings agency said on Friday the debt notes involved the commercial papers/medium-term notes programme (2005/2012), from A3 to BBB1, with a negative outlook. Concurrently, the short-term rating has been maintained at P2.

RAM Ratings said the downgrading of Texchem's long-term rating was based on its weakened business and financial performance.

It cited that three of the group's five divisions delivered a poorer-than-expected showing in the first 9 months of FYE December 2011 (9M FY Dec 2011).

Texchem's food division sank back into the red after it turned around in FY Dec 2010, while operational issues weighed down on its family-care division.

Meanwhile, Texchem group's polymer-engineering division, which has yet to recover from the previous downturn, is likely to continue facing tough operating conditions.

'Now into its fourth year of net losses, Texchem's eroded shareholders' funds and heftier debt load are undermining the strength of its balance sheet; the group is highly leveraged, with an adjusted gearing ratio of 1.97 times as at end-September 2011," said Kevin Lim, RAM Ratings' Head of Consumer and Industrial Ratings.

"Moving forward, the group's adjusted gearing ratio is expected to deteriorate, mainly due to a heavier debt load. Should its losses persist, its shareholders' funds would also be eroded,' added Lim.

He added Texchem was also viewed to have tight liquidity owing to its large proportion of short-term borrowings against its cash reserves.

"Nonetheless, RAM Ratings understands that Texchem is looking at unlocking value of some of its assets. We believe this will generate significant net cash inflows that will help to considerably strengthen its balance sheet and liquidity position," it said.

In the meantime, the ratings also reflect Texchem's established market position as well as its geographical and business diversity. Its expanding restaurant operations currently boast the largest chain of Japanese restaurants in Malaysia while the Group is also a major local insecticide manufacturer with noteworthy shares of the insecticide markets in several ASEAN countries.

RAM Ratings said elsewhere, Texchem's industrial and polymer-engineering divisions have over three decades of operating track record. We opine its ability to penetrate the supply chain of large multinational corporations under its industrial and polymer-engineering operations is a testament to its competency and reliability.

The negative outlook on the long-term rating has been maintained premised on lingering concerns regarding Texchem's weak business and financial performance amid the current devastating floods in Thailand, the slowdown of the global semiconductor industry, and the mounting economic woes of the United States and European nations.

RAM Ratings said hese may have a greater impact on the group's performance than expected. The ratings could be downgraded further if Texchem's business performance deteriorates or its financial metrics do not improve, or its planned asset sale does not pan out.

On the other hand, the outlook may be revised to stable if the group is able to weather the current setbacks and its asset disposal results in a significantly stronger balance sheet.

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