ANTARA STEEL MILLS SDN BHD - 2016

MARC has affirmed its rating of AAA_IS(fg) on Antara Steel Mills Sdn Bhd’s (Antara) RM300.0 million Sukuk Mudharabah Programme with a stable outlook. The affirmed rating and outlook are underpinned by the unconditional and irrevocable financial guarantee provided by Danajamin Nasional Berhad (Danajamin) which carries a financial insurer strength rating of AAA/stable from MARC.

Antara’s standalone credit profile remains weak amidst challenging conditions for the domestic steel industry characterised by excess supply and cheaper steel imports from China. These factors have impeded local steel producers from benefiting from improved demand driven by an increase in infrastructure activity. In addition, Antara has sizeable unpaid receivables due from two related companies, namely Megasteel Sdn Bhd (Megasteel) and Lion DRI Sdn Bhd (Lion DRI).

MARC views that the collection of receivables from Megasteel and Lion DRI totalling RM74.1 million (net of impairment losses of RM60.0 million) as at June 30, 2015 (FY2015) will be protracted pending debt restructuring negotiations following their debt defaults in 2015 and following the temporary cessation of operations at the Megasteel plant in early 2016. Antara also suffered significantly lower sales, and in order to minimise further losses, Antara shut down the hot briquetted iron (HBI) plant in Labuan for 37 days on top of a 63-day closure for maintenance work in 9MFY2016, while the melt shop in Pasir Gudang has been shut down since December 2015. The company now sources billets for its steel bar production from the open market. For 9MFY2016, the utilisation rate of its Labuan and Pasir Gudang plants declined to about 42.0% and 21.5%, down from 61.0% and 43.0% respectively from the previous year.

For 9MFY2016, Antara’s unaudited revenue declined 42.8% y-o-y to RM468.7 million (9MFY2015: RM819.2 million) on lower sales volume and selling prices. The company registered a pre-tax loss of RM76.6 million on lower margins (9MF2015: pre-tax profit RM24.5 million). MARC notes Antara’s geographical concentration of HBI customers has changed over the years in tandem with market demand. For 9M2016, third-party domestic sales saw a modest improvement, but overall sales fell due to a further decline in international sales. The Pasir Gudang plant’s output continues to be sold internally to Amsteel Mills Marketing Sdn Bhd, a marketing subsidiary within the Lion group, which in turn sells to third parties. In 9MFY2016, Pasir Gudang’s revenue declined by 54.4% y-o-y to RM211.7 million.

With no significant recovery in the steel industry expected in the near term, MARC anticipates the weakness in Antara’s operating performance to persist. The company’s liquidity remains very tight with limited financial flexibility, and it continues to rely on cash flows generated from operations to meet short-term obligations. Antara made a repayment of RM60.0 million under the rated programme on June 28, 2016. Its current outstanding amount under the programme is RM120.0 million, of which RM60.0 million each is due on June 29, 2017 and June 28, 2018.

Noteholders are, nonetheless, insulated from the downside risks in relation to Antara’s credit profile by the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Major Rating Factors

Challenges/Risks

• Excess steel supply and keen competition from cheaper imports;
• Raw material price volatility and rising production costs; and
• Weak liquidity position.