Mithril Bhd - 2009

MARC has affirmed Mithril Bhd’s (Mithril) RM59 million Redeemable Convertible Secured Loan Stocks (RCSLS) rating at B+. The negative outlook on the rating has been maintained. The affirmed rating and continued negative outlook reflects MARC’s concern about the sustainability of the company as a going-concern given the lack of near-term recovery prospects for the company’s core business of polyurethane architectural mouldings manufacture. With Mithril’s financial and operating metrics expected to remain weak for the foreseeable future, MARC believes that full and timely redemption of the RCSLS will be highly dependent on the disposal of its commercial building, MAA Kota Kinabalu (MAAKK), which has been pledged as security for the RCSLS. The rental income from MAAKK and its other commercial building, MAA Kuching (MAAKCH), which amounts to about RM3.3 million per annum, adequately addresses Mithril’s debt service requirements on the RCSLS.

MARC notes that Mithril has initiated a series of measures to preserve its liquidity and stem losses. It has rationalised its mouldings manufacturing operations to drive down costs and improve efficiency. It is also divesting its underperforming non-core businesses and using the divestment proceeds to pare down debt. Mithril expects to raise RM13.60 million from the sale of its loss-making clay manufacturing business. Furthermore, the recent conversion of about 12.52 million units of 4% 5-year Irredeemable Cumulative Convertible Preference Shares (ICCPS) and outstanding RM59.78 million 8% 5-year Irredeemable Unsecured Loan Stocks (ICULS) into ordinary shares in March and April this year respectively has also eased its interest payment burden.

Despite these measures to strengthen the resilience of Mithril’s business, its financial metrics continued to be very weak. For twelve months ended June 30, 2009 (FY2009), revenue continued to decline to RM 24.9 million (FY2008: RM37.8 million) due to the continued demand weakness in its main export markets of US and Russia. Pre-tax losses has narrowed to RM3.93 million (FY2008: -RM16.9 million) mostly as a result of a waiver of interest and charges on borrowings from a related party amounting to RM12.1 million. The disposal of non-performing businesses also helped to reduce the bottom-line impact of their operating losses. The conversion of ICCPS and ICULS into equity as well as the partial redemption of RCSLS in the fourth quarter of FY2009 enabled Mithril to lower its debt-to-equity ratio to 1.22 times (FY2008: 1.42 times), a level MARC still regards as untenable in relation to its dismal business prospects.

Mithril has utilised the RM12.85 million in the RCSLS’ sinking fund account (SFA) to partially redeem and reduce the nominal outstanding amount of the RCSLS to RM46.02 million. MARC believes that Mithril will still be challenged to meet the revised scheduled sinking fund obligations from its internally generated cash flow for its next repayment due in June 2011. Pursuant to the revised SFA payment schedule, Mithril is required to build up the SFA balance to RM11.5 million by June 30, 2011, and RM34.5 million by March 4, 2012 over the subsequent three quarters.

Mithril’s continued weak trends and its sluggish near-to immediate-term trading outlook leads MARC to believe that Mithril will have to rely on refinancing or sale of its MAAKK building to meet principal repayments on the RCSLC. The MAAKK building, which was last valued in August 2009 at RM75 million, is expected to provide moderate recovery prospects for the loan stock holders.

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