Monday, Dec 18, 2000
Malaysian Rating Corporation Berhad (MARC) has assigned an Islamic debt rating of A-ID(S) (A minus, Islamic Debt Security) to Malaysian Newsprint Industries Sdn Bhd’s (MNI) RM923 million Bai’ Bi Al-Taqsit nominal value fixed rate serial bonds programme.
The rating reflects Malaysian Newsprint Industries Sdn Bhd’s (MNI) strong competitive position in the local newsprint industry, offtake agreements with its Malaysian sponsors and a tight underlying issue structure for the serial bonds programme. A positive feature of the issue structure includes the availability of liquidity support in the form of standby credit facilities of RM108 million. Proceeds from the serial bonds will be utilized to fully finance the acquisition of the combined heat and power plant from Laras Perkasa Sdn Bhd for an amount of up to RM244.3 million and the balance RM678.7 million is to refinance MNI’s existing borrowings. The rating is, however, moderated by the sensitivity of MNI’s earnings to changes in newsprint prices.
MNI commenced operation as the only local producer of newsprint in April 1999. The newsprints are produced from recycled old newspapers 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%), R.H. Development Corporation Sdn Bhd (5.67%) and Rimbunan Hijau Estate Sdn Bhd (5.67%). A Norwegian based company, Norske Skog Industrier is one of the largest newsprint producers in the world.
Newsprint is the most important element in newspaper printing. Demand for newsprint, like other forest products, is highly cyclical and bears a correlation to the economic cycles. Newsprint prices, which are quoted in US dollar, have historically been volatile reflecting patterns of global demand and supply. While further pricing volatility is expected in global markets, the continuing consolidation among the global producers should lead to a more effective control over the supply side of the price equation.
MNI’s exposure to fluctuations in newsprint demand is reduced through the Newsprint Offtake Agreements with its Malaysian sponsors. The sponsors, either directly or indirectly through connected publishers, undertake to purchase a minimum aggregate amount of 100,000 tonnes per annum of the company’s newsprint production. This represents 40% of the newsprint plant’s capacity.
Liquidity risk under the issue structure is mitigated through the availability of a liquidity support in the form of standby credit facilities and the maintenance of a six months profit liquidity cover in the Debt Service Reserve Account (DSRA). Drawdowns under the facility will be made to cover any shortfall arising in the DSRA for the purpose of redeeming the primary bonds due under a particular series. The progressive reduction of the debt over the life of the facility mitigates refinancing risk at the final maturity of the bonds.
As with most newsprint producers, MNI’s earnings are cyclical, reflecting the volatile nature of newsprint prices. The operating margin of MNI improved to negative 11.3% in FY June 2000 (FY99: -63.8%), as a result of an almost six-fold increase in turnover to RM405.6 million (FY99: RM69.2 million). MARC expects that improving market fundamentals for newsprint would support near term price increases. And with the positive outlook for newsprint demand, this will translate to a further improvement in MNI’s profitability measures. Pro-forma debt leverage (after the bonds issue) will rise to 1.08 times from 0.81 times before trending downwards in the medium term.
The rating reflects Malaysian Newsprint Industries Sdn Bhd’s (MNI) strong competitive position in the local newsprint industry, offtake agreements with its Malaysian sponsors and a tight underlying issue structure for the serial bonds programme. A positive feature of the issue structure includes the availability of liquidity support in the form of standby credit facilities of RM108 million. Proceeds from the serial bonds will be utilized to fully finance the acquisition of the combined heat and power plant from Laras Perkasa Sdn Bhd for an amount of up to RM244.3 million and the balance RM678.7 million is to refinance MNI’s existing borrowings. The rating is, however, moderated by the sensitivity of MNI’s earnings to changes in newsprint prices.
MNI commenced operation as the only local producer of newsprint in April 1999. The newsprints are produced from recycled old newspapers 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%), R.H. Development Corporation Sdn Bhd (5.67%) and Rimbunan Hijau Estate Sdn Bhd (5.67%). A Norwegian based company, Norske Skog Industrier is one of the largest newsprint producers in the world.
Newsprint is the most important element in newspaper printing. Demand for newsprint, like other forest products, is highly cyclical and bears a correlation to the economic cycles. Newsprint prices, which are quoted in US dollar, have historically been volatile reflecting patterns of global demand and supply. While further pricing volatility is expected in global markets, the continuing consolidation among the global producers should lead to a more effective control over the supply side of the price equation.
MNI’s exposure to fluctuations in newsprint demand is reduced through the Newsprint Offtake Agreements with its Malaysian sponsors. The sponsors, either directly or indirectly through connected publishers, undertake to purchase a minimum aggregate amount of 100,000 tonnes per annum of the company’s newsprint production. This represents 40% of the newsprint plant’s capacity.
Liquidity risk under the issue structure is mitigated through the availability of a liquidity support in the form of standby credit facilities and the maintenance of a six months profit liquidity cover in the Debt Service Reserve Account (DSRA). Drawdowns under the facility will be made to cover any shortfall arising in the DSRA for the purpose of redeeming the primary bonds due under a particular series. The progressive reduction of the debt over the life of the facility mitigates refinancing risk at the final maturity of the bonds.
As with most newsprint producers, MNI’s earnings are cyclical, reflecting the volatile nature of newsprint prices. The operating margin of MNI improved to negative 11.3% in FY June 2000 (FY99: -63.8%), as a result of an almost six-fold increase in turnover to RM405.6 million (FY99: RM69.2 million). MARC expects that improving market fundamentals for newsprint would support near term price increases. And with the positive outlook for newsprint demand, this will translate to a further improvement in MNI’s profitability measures. Pro-forma debt leverage (after the bonds issue) will rise to 1.08 times from 0.81 times before trending downwards in the medium term.