MARC has downgraded the rating of Mithril Berhad’s (“Mithril”) RM59 million Redeemable Convertible Secured Loan Stocks (“RCSLS”) from BBB to BBB- with a negative outlook based on continued deterioration in the company’s financial profile, its weak operating outlook for 2007 and uncertainties about the future operating performance of new ventures.

Mithril manufactures and trades architectural mouldings under Mithril Saferay Sdn Bhd (“Saferay”). The mouldings business contributes 90% of Mithril’s revenue whilst rental income from property investments accounts for the remainder. Over 60% of Mithril’s manufacturing revenue is derived from exports to North America. Mithril’s recent venture into the construction of luxury yachts under Mithril FRP Sdn Bhd has not generated returns as yet while its brick manufacturing operations which were halted due to a fire outbreak in January of 2006 has yet to restart operations. The plant is currently under rehabilitation and is only expected to commence full operation in the last quarter of 2007. Other new ventures under Mithril PVC Sdn Bhd (“Mithril PVC”) involving the manufacture and distribution of PVC products are only expected to commence operations in the second half of 2007. However, there is no definite indication that Mithril PVC will contribute positively to the group.

Recurring rental income from Mithril’s two commercial buildings in Kota Kinabalu and Kuching which are leased to Malaysian Assurance Alliance Berhad (“MAA”) continues to provide a stable income stream for Mithril while the channeling of a pre determined portion of this rental income into a Sinking Fund Account to redeem outstanding RCSLS upon maturity provides further comfort to RCSLS holders.

For FY2006, Mithril posted a higher pre-tax loss of RM10.88 million against a pre-tax loss of RM6.12 million in the previous year. The weaker performance is attributable to the erosion of its export sales margin as a result of the strengthening of the Ringgit against the US dollar; a change in accounting policies; allowances for doubtful debts; and an increase in operating costs. The DSCR stood at 4.30 times in FY2006 and going forward, Mithril has projected a minimum and average DSCR of 1.65 and 5.40 times respectively following higher projected revenues from Saferay and Mithril PVC. The debt to equity ratio in FY2006 was 1.01 times, below the covenanted level of 1.50 times. The company’s interim results for the 6 months of FY2007 reflect further deterioration in earnings primarily due to lower demand for its PU mouldings from its North American markets. It is unclear when this trend will begin to reverse.

The commitment exhibited by Mithril’s majority shareholder, MAA Holdings Berhad (“MAA Holdings”) who in April 2007 extended an RM5.3 million short-term facility, through MAA Credit Sdn Bhd, to meet Mithril’s working capital requirements, continues to be a moderating factor in the rating. Mithril is expected to refinance this facility via bank borrowings by July 2007. Additionally, changes have been made at Senior Management level to address the challenges facing the company. To maintain the rating, Mithril will have to show progress toward restoring profitability and cash flow generation.