Rationale

MARC has upgraded the long-term ratings of Paradym Resources Industries Sdn Bhd (PRI) to AID (A Flat, Islamic Debt) from A-ID and has affirmed the short term ratings at MARC-2ID for PRI’s Islamic Commercial Paper/Medium Term Note Issuance Programme (Islamic CP/MTN). The outlook is stable. The ratings upgrade and reaffirmation reflects PRI’s strengthening financial profile arising from its acquisition of The Royal Mint of Malaysia Sdn Bhd (RMM) in March 2006 and its raw material supply contract with Bank Negara Malaysia (BNM) which not only allows a pass through of costs thus mitigating any downside but also allows the company to fund its purchases through BNM. Moderating the rating is the supply risk inherent in the company’s dependence on Metrod Berhad for its supply of copper cathode.

PRI is primarily engaged in the manufacturing and selling of copper rods, copper wire and copper strips particularly for the power and telecommunication industries. PRI has entered into an agreement with RMM to supply and deliver Cupro-Nickel 25 (CuNi) strips to RMM for its blanking line for coins, on behalf of BNM. Simultaneously, PRI has also entered into an agreement with BNM to supply the raw materials for the project. RMM is obliged to take-up the whole contracted amount, thus substantially mitigating demand risk for the project. Since December 2004, PRI has started to procure raw materials and commenced the production of CuNi.

The new machinery acquired using the bond proceeds enables PRI to produce approximately 40 different copper alloys allowing it to reduce its dependence on few products. The project’s credit risk is mitigated given that the CuNi project’s payments will be made by BNM and RMM. The stable and predictable cash flows can substantially meet PRI’s obligations toward the CP/MTN.

PRI has registered a commendable CAGR revenue growth of 67.9% since 2001. The company’s operating margin rebounded to 13.7% in 2005 due to better results on a consolidated basis. The earnings from operations are sufficient to cover its debt obligations as reflected by the 2.5 times OPBIT interest coverage. As of August, PRI has pared down its borrowings to 2.29 times, below the covenanted 2.50 times.

Under the issue structure, 10% of the proceeds from the CuNi projects would be captured under a designated account specifically earmarked for the redemption of the bonds. Additionally, an amount of RM1.5 million was pre-funded (utilising bond proceeds) and is to be maintained at all times. These covenants serve to mitigate short-term liquidity risk. Refinancing risk is also reduced by the serial redemption of the Islamic CP/MTN.