MARC has reaffirmed the rating of Malaysian Newsprint Industries Sdn Bhd’s (MNI) RM923 million Bai’ Bi Al-Taqsit nominal value fixed rate serial bond programme (BBAT) at BBBID +(s). MNI’s rating has been placed under MARCWatch with a negative outlook following the BBAT holders’ approval on the company’s proposed debt restructuring scheme which entails, among others, a 3-year scheduled repayment moratorium from December 2003 until June 2006; consequently, deferring the repayment of RM72 million principal redemption due on 29th December 2003 to 29th December 2006. The repayment moratorium would provide MNI the opportunity to accumulate funds with an expectation of improved newsprint prices. MARC will continue to monitor MNI’s development to assess the impact on its rating, going forward.

MNI started operations as the only domestic newsprint producer in 1999 and currently holds a market share of around 60%. The shareholders of MNI are Hong Leong Industries Berhad, Norske Skog Industrier, The News Straits Times Press, R.H. Development Corporation and Rimbunan Hijau Estate Sdn Bhd. Norske Skog Industrier is one of the largest newsprint producers in the world.

Reflecting depressed newsprint prices averaging below USD450/MT for the past two years, MNI’s financials have weakened, posting RM82.5 million loss in FY2003. While the cyclical swings in newsprint prices will persist, MARC believes that MNI’s financial position should improve following higher newsprint prices, which was quoted at USD525/MT during the fourth quarter of 2003
indicating an upcycle trend. Prices are expected to further improve by another USD50/MT in the first quarter of 2004. The government’s move to increase duties on imported newsprint should also support MNI’s role as the sole newsprint producer in the country.

MNI benefits from offtake agreements with three (3) local major publishers. Sales of forty percent of MNI’s yearly newsprint production, equivalent to 100,000 tonnes per annum are secured through Newsprint Offtake Agreements (NOA) entered into with New Straits Times Press, Pemandangan Sinar and Nanyang. The minimum offtake commitments somewhat mitigate the company’s exposure to fluctuations in newsprint demand.

In FY2003, MNI’s gearing level ratio deteriorated to 1.05x from 0.96x in 2002, as a result of the company’s accumulated losses. Cash flow from operations (CFO) interest coverage also mirrored weaker results at 0.99x from 1.73x posted in FY2002.

Under the debt restructuring scheme, the BBATholders have agreed to give indulgence on the financial covenants during the moratorium period. Going forward, MNI’s revised cash flow projection under the restructuring exercise indicated healthier CFO interest coverage and DSCR; averaging 9.52x and 2.40x respectively. However, the sensitivity analysis which incorporates lower newsprint prices reveals that MNI’s cash flow is highly vulnerable to fluctuations, particularly during the down cycle scenario.