MARC has downgraded the rating of Stenta Films (Malaysia) Sdn Bhd’s (Stenta) RM90 million Murabahah Notes Issuance Facility (MUNIF) from MARC-3ID to MARC-44 ID IDwith negative outlook following representations from the company that it intends to refinance the facility. At the same time, MARC has placed .tThe ratings of the MUNIFalso remains on MARCWatch, with a negative outlookimplications. The rating action is premised on recent representations by the company that it intends to refinance the facility. This leads to concerns over the company’s ability to successfully do so, in view of Stenta’s previous inability to meet scheduled payments in a timely manner ,as evidenced by previous rescheduling requests., lead to concerns over the company’s ability to successfully refinance the facility. recent revelations thatcompany has been unable to top up cash reserves in its maintenance account to the covenanted requirement of RM5 million (the current short fall being about RM4.5 million). The remedy period which expired on 29 December 2006 means that there is now a breach of covenants and note holders are at liberty to call an event of default. This further makes refinancing a remote option.

uncertainty over the status of Abrar as the sole underwriter for the facility. The rating for Stenta has also been pressured by concerns regarding the increasingly competitive packaging market and the consequent impact on Stenta’s operating measurements. On the positive side, debt protection has improved marginally for the period under review. Stenta’s rating was put on MARCWatch Negative on 16 June 2006 when the company approached note holders to consider a 2nd proposal to reschedule its debt after an earlier proposal was approved by Note holders in August 2005. Note holders rejected the proposal and Stenta on 29 September 2006 aborted the plan and redeemed and cancelled RM3.0 million of the MUNIF notes in accordance with the initial rescheduling. MARC had on 29 December 2006 has extended the MARCWatch Negative on Stenta following ABRAR Discount Berhad (ABRAR)’s announcement on Bank Negara Malaysia’ s Instruction to ABRAR to ceaseon its cessation of operations, Abrar being the sole underwriter.

At present, the Company is facing a shortfall of about RM4.5 million in its Maintenance Account vis-à-vis the required minimum balance after its debt repayment, which fell due on 29 December 2006 (paid in late September 2006). More crucially, the next repayment of RM7.0 million will be due in September 2007.

Stenta is the leading domestic manufacturer of Biaxially Oriented Polypropylene (BOPP) film commanding approximately 50% of the market. On the back of strong operational and technical support from P.T. Argha Karya Prima Industry of Indonesia (AKPI) who has more than 20 years of experience in producing BOPP film, Stenta has been able to gain market share by producing better quality BOPP film.

As refinancing of this facility now appears inevitable based on higher rescheduled back end payments and the inability of Stenta to meet these payments based on its projected cash flows, the risks surrounding Stenta’s ability to obtain refinancing are exacerbated. Liquidity risks, on the other hand, are alleviated by the maintenance of cash reserves in designated accounts i.e. when the MUNIF was issued, RM5.0 million was deposited into a Maintenance Account to serve as a liquidity buffer for note holders.

The company’s failure to top up the maintenance account within the remedy period has heightened liquidity risks and greatly reduced the

Despite reporting higher revenue in FY2005, Stenta’s profitability was affected by higher cost of sales, reflected in the lower pre-tax profit and operating profit margins. Despite the fact that two-thirds of the principal repayments are only scheduled in the sixth and seventh year of the MUNIF, a scheduled principal repayment of RM7.0 million due in September 2007 is a concern while, Stenta’s liquidity position is expected to weaken in the absence of a refinancing facility.