MARC has downgraded the rating of Antara Steel Mill Sdn Bhd’s (“Antara”) Islamic debt from A+ID to AID with a stable outlook. The rating reflects the deterioration in the financial profile of the company arising from the under performance in FY2006 of its billets and bars operations and the unscheduled plant shutdown at its hot briquetted iron (“HBI”) operation in Labuan. The company’s debt leverage level at 1.93 times is close to the covenanted cap of 2 times further limiting its financial flexibility. Mitigating factors are the more positive outlook on the industry domestically and globally which was reflected in a recovery in both its billets, bars and HBI operation towards the end of FY2006.

In early FY2006, Antara’s billets and steel bars plants in Pasir Gudang, Johor experienced a slowdown in production due to lagging demand which in turn had a negative effect on Antara’s performance. Exacerbating the situation was the unexpected shutdown of its HBI operation in Labuan for five and a half months due to the rupture of a nitrogen gas tank at start up, after scheduled maintenance, in October 2005. Due to these factors Antara operated at capacities of 53% (FY2005:103%) and 50% (FY2005:47%) for billets and steel bars respectively in FY2006 while the production of HBI plunged to a utilisation rate of close to 41% against 93% recorded in FY2005. Antara’s management views the plant shutdown as a one-off incident as no comparable incidents have been reported worldwide at similar plants.

In FY2006, the Group only managed to generate RM749.9 million in revenue resulting in a pre-tax loss of RM81.8 million. The loss is solely attributable to losses at its billets and bars operations as the HBI operation was still able to register a profit of RM31.6 million despite the long shutdown.

An insurance claim arising from the plant shutdown is currently under negotiation and once received will help improve Antara’s cash flow position going forward. MARC however foresees that due to the sizeable quantum of the claim, the settlement of the same will take some time to materialise.

Liquidity risk has been moderated under the BaIDS issue structure through the maintenance of one pre-funded semi-annual profit payment at all times and the priority ranking accorded to payment obligations under the BaIDS in the Revenue Account payment waterfall; ahead of operational expenditure and working capital requirements.

Antara has projected an average and minimum financial service coverage ratio (“FSCR”) of 5.0 times and 3.4 times respectively, on the assumption of no dividend payout for the entire tenure of the Islamic Debt.