Thursday, Apr 04, 2002

Malaysian Rating Corporation Berhad (MARC) has lowered the long-term rating of Faber Group Berhad’s (Faber) RM1,561,652,149 nominal value of zero coupon redeemable convertible bonds to BB- (double B minus) from BB (double B flat) previously.

The downgrade reflects the negative outlook for the tourism industry following slumping travel demand post September 11. This is expected to further weaken the group’s debt servicing capacity with recent sliding market valuations of its hotels. Somewhat offsetting these negative factors are the strategic location of its property development at Taman Desa and its profitable healthcare concession.

Faber is an investment holding company whose subsidiaries are involved in the hotel business, property development and management and the provision of healthcare support services. The group’s operating performance continued to be restrained by the high interest expenses it incurred since 1996 for the construction and upgrading work of its hotels. In accordance with the Composite Scheme of Arrangement in November 2000 between the group and its creditors, over RM1 billion of debt was settled through the issuance of the Irredeemable Convertible Unsecured Loan Stocks (ICULS) and RCBs in October and November 2000 respectively. The 50% capital reduction was also completed in December 2000.

Faber is the franchisee of the internationally reputable Sheraton chain of hotels in Malaysia (except for the Sheraton Langkawi Beach Resort). Its seven hotels enjoy good geographic spread and comprise both city and resort hotels. Despite the improvement in revenue and average occupancy rates to 59% in 2001 (FY2000: 54.5%), profitability was eroded by substantial interest cost. Meanwhile, the performance of its hotels have an important bearing on disposal values. Faber relies on the proceeds from the disposal of its hotels for the redemption of the RCBs. The latest developments affecting the hospitality sector significantly limits any upside to the valuation of hotels in the short to medium term.

Losses suffered by the hotel operations are moderated at the consolidated level by contributions from its property arm and healthcare operations. The group’s property developments benefit from their strategic location, good accessibility and affordable pricing, as reflected in the good take-up rates of its past projects. The division’s revenue base is also supplemented by rental income from its two commercial properties; Faber Towers and Penang Plaza. Meanwhile, its investment in the hospital support services industry has been consistently recording profits since the award of the concession. The services are provided to government hospitals in the northern states, Sabah and Sarawak under a 15-year concession from the government.

The main source of repayment of the secured bonds is expected to be derived from the disposal of the group’s assets progressively by the 3rd, 4th and 5th anniversaries of the RCBs. Given the group’s existing frail financial position, MARC does not expect any material and sustainable contribution from Faber’s operating cash flow towards the redemption of the RCBs. Debt service capacity will hence be dependent on a sufficiently strong recovery in the hotel sector to boost operating performance and asset values. With a significant portion of its assets already charged as security for its borrowings, Faber’s financial flexibility is limited.