Thursday, Jan 16, 2003
Malaysian Rating Corporation Berhad (MARC) has affirmed the rating of Malaysian Newsprint Industries Sdn Bhd’s (MNI) RM923 million Bai’ Bi Al-Taqsit Fixed Rate Serial Bonds at BBB+(s)ID. The affirmation of the rating reflects MNI’s continued competitive strength as the sole newsprint producer in Malaysia; secured offtake commitments through newsprint offtake agreements; its low operational risk; and liquidity support in the form of RM108 million standby credit facilities. Moderating factors to the rating include currently low global newsprint prices, albeit some improvement from recent months, and the uncertain outlook - taking cue of the newsprint performance in North America which dominates the global newsprint market.
MNI commenced operation as the only local producer of newsprint in April 1999. The company’s newsprint is produced from recycled old newspaper and old magazines. MNI’s mill is located in an industrial park at Mentakab, Pahang. The shareholders of MNI are Hong Leong Industries Berhad (33.65%), Norske Skog Industrier (33.65%), The New Straits Times Press (21.36%) and Rimbunan Hijau Group (11.34%). A Norwegian based company, Norske Skog Industrier is one of the largest newsprint producers in the world.
Newsprint is the most significant cost component in newspaper printing. The demand for newsprint, like other forest products, is highly cyclical and susceptible to economic cycles. The price for MNI’s newsprint follows world newsprint prices, which have historically exhibited a pattern of cyclical swings. In 2001, world newsprint prices entered into a cyclical trough, bottoming at an all-time low of USD450 per tonne. Despite efforts by North American newsprint producers to curtail production and reduce excess inventories, soft pricing conditions persisted mostly throughout 2002 but are expected to gradually recover thereafter. Production cost is critical as it effectively establishes the newsprint price floor. When newsprint prices fall below the average variable costs of the highest-cost manufacturer, that producer must either sell its products at a loss or is forced to shut down, hence returning to equilibrium. While MARC believes that the cyclical swings in newsprint prices will persist, ongoing consolidation among global producers should permit demand and supply to come into a better balance. With regards to the negative impact on the local newsprint industry caused by dumping of newsprint in rolls from countries like Canada, Indonesia, South Korea and the US, MNI recently submitted a petition to the Ministry of International Trade and Industry which consequently initiated a preliminary investigation into the matter.
MNI benefits from offtake agreements with three Malaysian major publishers to purchase a minimum aggregate amount of 100,000 tonnes per annum of the company’s newsprint production, currently 40% of MNI’s planned capacity. This, however, does not insulate the company from competition in its home market or the effects of global demand-supply trends. The persistent weakness in newsprint prices has led MNI to defer a capacity expansion and to focus on optimising its capacity utilisation. MNI plant’s utilisation rate is currently above 90%.
Reflecting the down cycle of newsprint prices which plummeted to around USD450 per metric tonne, MNI’s revenue in FY2002 slumped to RM410.2 million from RM531.1 million previously. And with high depreciation and interest expenses, the company suffered a pre-tax loss of RM70.5 million. Its debt leverage position is expected to gradually reduce in the medium term in view of the progressive reduction of the serial bonds. However, the fairly heavy bond amortization schedule on a semi-annual basis will further constrain its cash flows and financial flexibility, going forward.
MNI’s liquidity risk under the issue structure is mitigated through the availability of a liquidity support in the form of standby credit facilities, the maintenance of six months profit liquidity cover in the Debt Service Reserve Account (DSRA) and monthly build-up towards principal repayment. Drawdowns under the standby credit facilities will be made to cover any shortfall arising in the DSRA for the purpose of redeeming the primary bonds due under a particular series.
MNI commenced operation as the only local producer of newsprint in April 1999. The company’s newsprint is produced from recycled old newspaper and old magazines. MNI’s mill is located in an industrial park at Mentakab, Pahang. The shareholders of MNI are Hong Leong Industries Berhad (33.65%), Norske Skog Industrier (33.65%), The New Straits Times Press (21.36%) and Rimbunan Hijau Group (11.34%). A Norwegian based company, Norske Skog Industrier is one of the largest newsprint producers in the world.
Newsprint is the most significant cost component in newspaper printing. The demand for newsprint, like other forest products, is highly cyclical and susceptible to economic cycles. The price for MNI’s newsprint follows world newsprint prices, which have historically exhibited a pattern of cyclical swings. In 2001, world newsprint prices entered into a cyclical trough, bottoming at an all-time low of USD450 per tonne. Despite efforts by North American newsprint producers to curtail production and reduce excess inventories, soft pricing conditions persisted mostly throughout 2002 but are expected to gradually recover thereafter. Production cost is critical as it effectively establishes the newsprint price floor. When newsprint prices fall below the average variable costs of the highest-cost manufacturer, that producer must either sell its products at a loss or is forced to shut down, hence returning to equilibrium. While MARC believes that the cyclical swings in newsprint prices will persist, ongoing consolidation among global producers should permit demand and supply to come into a better balance. With regards to the negative impact on the local newsprint industry caused by dumping of newsprint in rolls from countries like Canada, Indonesia, South Korea and the US, MNI recently submitted a petition to the Ministry of International Trade and Industry which consequently initiated a preliminary investigation into the matter.
MNI benefits from offtake agreements with three Malaysian major publishers to purchase a minimum aggregate amount of 100,000 tonnes per annum of the company’s newsprint production, currently 40% of MNI’s planned capacity. This, however, does not insulate the company from competition in its home market or the effects of global demand-supply trends. The persistent weakness in newsprint prices has led MNI to defer a capacity expansion and to focus on optimising its capacity utilisation. MNI plant’s utilisation rate is currently above 90%.
Reflecting the down cycle of newsprint prices which plummeted to around USD450 per metric tonne, MNI’s revenue in FY2002 slumped to RM410.2 million from RM531.1 million previously. And with high depreciation and interest expenses, the company suffered a pre-tax loss of RM70.5 million. Its debt leverage position is expected to gradually reduce in the medium term in view of the progressive reduction of the serial bonds. However, the fairly heavy bond amortization schedule on a semi-annual basis will further constrain its cash flows and financial flexibility, going forward.
MNI’s liquidity risk under the issue structure is mitigated through the availability of a liquidity support in the form of standby credit facilities, the maintenance of six months profit liquidity cover in the Debt Service Reserve Account (DSRA) and monthly build-up towards principal repayment. Drawdowns under the standby credit facilities will be made to cover any shortfall arising in the DSRA for the purpose of redeeming the primary bonds due under a particular series.