Thursday, Feb 03, 2000

Malaysian Rating Corporation Berhad (MARC) has assigned a stand-alone long-term rating of BB (double B flat) to Faber Group Bhd’s proposed Redeemable Secured Convertible Bonds of up to RM1.23 billion nominal value (before accumulation of interests).

Faber Group Berhad’s (Faber) rating reflects the group’s ill-timed expansion into the over-built hotel sector, its high debt leverage position and weak debt servicing capacity. Offsetting these negative factors are the secured nature of the bonds, its property development at the strategically located 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 provision of healthcare support services. The group’s operating performance had been profitable up to 1996, when it began to incur substantial borrowings for the ongoing construction and refurbishment of its hotels. The weak fundamentals in this sector coupled with the escalating interest charges significantly eroded the group’s profitability and impaired its cash flow position, resulting in its inability to continue servicing its debts since end 1998. Under a scheme of arrangement between the group and its creditors, a total of RM1 billion of debt will be satisfied through the issuance of redeemable secured convertible bonds and ICULS.

Faber is the franchisee of the internationally reputable Sheraton chain of hotels in Malaysia (except for the Sheraton Langkawi Beach Resort). Geographically well spread, the hotels comprise both city and resort hotels. The hotel division’s profitability was affected by the severe room glut in the industry against declining tourist arrivals over the last three years. The demand-supply mismatch had driven down the industry average occupancy rate to a historical low of 49.9% despite the rampant price undercutting. Faber’s hotels recorded a low average occupancy of 45% for FY99. The large room supply overhang is particularly acute in Kuala Lumpur, where occupancy levels and room rates are not expected to significantly recover in the near-to-medium term.

Losses suffered by the group’s hotel operations are moderated at the consolidated level by profits contributed by its property development and healthcare operations. Faber’s property developments benefit from their strategic locations, good accessibility and affordable pricing, as reflected in the good take-up rates of past projects. The group also earns rental income from its two commercial properties; Faber Towers and Penang Plaza. Hospital support services has consistently been a profitable line of business for the group. 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 hotels, with the exception of Sheraton Imperial in KL. MARC believes that the value of the group’s hotel properties would gradually recover with the narrowing of the demand-supply gap in the intermediate term. Nonetheless, even with the improved outlook, MARC believes that the net disposal proceeds will still not be sufficient for the full retirement of the bonds.

The group’s profitability is expected to improve on reduced interest charges following the implementation of the debt restructuring scheme, and the continued profitable operations of its property and healthcare divisions. Faber’s cash flow position will also improve in the next three years, aided by the interest savings. Debt service capacity, however, will be dependent on a recovery in the hotel sector and conversion of part of the bonds into shares. The pro-forma debt leverage will fall to 2.27 times upon the implementation of the scheme, following the exchange of unsecured debts for ICULS.