Tracoma Holdings Bhd - 2009

MARC has assigned a CID rating to Tracoma Holdings Bhd's (Tracoma) proposed RM100 million Restructured Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS).  The Restructured BaIDS will be issued in connection with Tracoma's debt restructuring plan which involves its existing BaIDS holders. Accordingly, MARC has withdrawn its D rating on Tracoma’s existing RM100 million BaIDS which will be replaced with the proposed restructured BaIDS.

The rating reflects MARC’s view that Tracoma’s financial and operational restructuring efforts will likely be insufficient to address the autoparts maker’s near-term liquidity and longer term operational and financial issues.  The continued losses after tax since FY2006 and sustained erosion of Tracoma’s equity base has left the company in a precarious state with nominal liquidity to support its working capital needs and required investments in new moulds and dies.  MARC believes that Tracoma’s return to profitability and positive operating cash flow generation will be hindered by the lack of meaningful improvement in its near-term liquidity and capital structure.  Accordingly, the assigned rating reflects our concern that Tracoma remains highly vulnerable to non-payment of its obligations under the Restructured BaIDS.

MARC is of the view that credit fundamentals of the domestic automotive parts sector to which Tracoma belongs remain weak moving into 2010.  Our view incorporates lack of scale economies, significant customer concentration risk, high capital expenditure needs and increasing exposure to the risk of short product cycles.  MARC is of the view that the foregoing will continue to hinder the industry’s return to meaningful profitability in the near term.

As at June 30, 2009, Tracoma had approximately RM157.2 million of total debt, of which RM100.0 million represents existing BaIDS to be exchanged for the Restructured BaIDS.  The continued erosion of its equity base due to losses has left the company with a high debt leverage of 8.13 times (x) as measured by the ratio of debt-to-equity and negative measures of cash flow protection.  Tracoma is expected to rely on asset sales to meet its first of four annual RM25 million principal repayments beginning FY2013 according to the redemption schedule of the Restructured BaIDS.  There remains significant uncertainty as to whether Tracoma will be able to sufficiently restore its profitability and cash flow to the levels that could accommodate the remaining principal repayments in FY2014 through FY2016.

Tracoma has closed down three of its seven factories and centralised raw material purchases to reduce the  cost  of  raw materials.  However,  considerable risks remain  that Tracoma’s efforts will fall short of
anticipated gains.  The  prospects  of  earnings improvement  are  also dependent on  national car sales, especially Proton’s, and to a smaller extent, Perodua’s, and favourable reception of new vehicle launches.  Additionally, Tracoma needs to have sufficient liquidity to sustain its operations, absent which Tracoma would be vulnerable to a loss of support from suppliers and customers.

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Challenges/Risks