Englotechs Holding Bhd - 2008 Credit Commentary Report

MARC has removed its rating on Englotechs Holding Berhad’s (Englotechs) RM50.0 million Murabahah Medium Term Note Programme (MMTN) from MARCWatch Negative and downgraded the rating to BBID¬ from BBB-ID. Englotechs’ rating was first placed on MARCWatch Negative on April 1, 2008 due to a breach in financial covenants. The outlook on the rating is now negative.

The downgrade is premised on the group’s dismal operational and financial performance, large provisions for bad debts and persistent financial covenant breaches since June 2007. Since MARC’s last rating update of the MARCWatch Negative on September 30, 2008, Englotechs has yet to remedy its financial covenants in particular its Finance-to-Net-Tangible-Assets Ratio (FNR) which is below the covenanted level of 1.35 times. In addition, the company has failed to top-up its Finance Service Reserve Account (FSRA) within the stipulated one month after withdrawing funds to meet its profit payment obligations. Englotechs is currently seeking noteholders’ indulgence for both breaches until March 2009, when the next profit payment is due. In another negative development, on December 3, 2008, Englotechs was classified as an Affected Listed Issuer under Bursa Malaysia’s Amended Practice Note 17 (PN17). The company faces the risk of de-listing should it fail to regularise its financial conditions. MARC believes that this recent development would negatively impact its financial flexibility.

Englotechs is involved in the manufacturing and trading of cotton gloves, primarily industrial work gloves. Its manufacturing facilities are located in Padang Meha Industrial Estate, Kedah in Malaysia and Lianyungang, China. The company has concluded voluntary rescheduling of its borrowings with some of its lenders but have yet to reach an agreement with two other lenders. It recorded a pre-tax loss of RM1.2 million for the three-month period ended September 30, 2008 (3QFY2007: pre-tax profit of RM1.2 million) on revenue of RM20.8 million (3QFY2007: RM29.5 million). The company’s liquidity position is tight, evidenced by cash and bank balances of RM2.3 million as at end-September 2008 against overdraft and short-term borrowings of RM33.6 million. The company’s gearing further deteriorated to 2.63 times from 2.16 times as at end of financial year ended December 31, 2007.

The negative outlook largely reflects heightened repayment risk on its first principal payment of RM10.0 million due in September 2009. MARC will continue to closely monitor the indulgences granted by lenders and progress made in restructuring its debt obligations. Failures by Englotechs to put in adequate measures to address its coming profit payment in March 2009 or subsequent principal repayment will result in further downward rating action.