The ratings of CNLT (Far East) Berhad’s (CNLT) RM60 million Bank Guaranteed CP/MTN have been affirmed at A(bg)/ MARC-1(bg) with Stable Outlook. The reaffirmation reflects the weakest link rating of the unconditional and irrevocable bank guarantees provided by a consortium of financial institutions. The bank guarantors consist of Aseambankers, Malayan Banking Berhad, CIMB Bank Berhad and EON Bank Berhad.

CNLT is a medium-sized manufacturer of yarn based in Senawang Industrial Estate in Seremban. The year 2005 was a challenging year as sales from the US market declined further due to intensifying competition after the abolishment of quotas and restrictions under the Multi-Fibre Agreement (MFA). Cheaper textile imports from China, India and Pakistan resulted in US customers outsourcing finished goods instead of manufacturing such goods themselves. With the changing landscape of the textile industry as well as increase in production cost, CNLT financial performance has been deteriorating for the last 3 years.

Although revenue increased by 19% from RM 46 million in year 2004 to RM 54 million in year 2005 attributable to higher selling prices and improved capacity utilization, the company could not keep up with the rise in raw material cost which consequently affected the operating results. The group posted its 3rd straight operating loss of RM9 million in year 2005 against RM8 million in the previous year. For the 9 month results as at 30 September 2006, the group continued to post losses despite the fact that revenue increased by 7.5% to RM44 million compared to RM 41 million in the previous corresponding period. Operating losses, on the other hand, increased by RM1 million to RM 7 million against a loss of RM6 million in the previous corresponding period. The continued loss was the result of the increase in raw material costs as well as operating expenses.

The group’s cash flow position also continues to remain weak. The cash flow from operations posted a deficit of RM4 million for FY2005 against an inflow of RM 9 million in the previous year. The group’s capital expenditure during the year stood at RM4 million which was financed using short term borrowings. Currently, the group is relying heavily on its trade facilities to finance its working capital. Despite the weak cash flow, the group’s debt service cover ratio (DSCR) of 1.77 times is within the covenanted level of 1.2 times. The cash flow from operating activities showed an improvement for the 9 months ended 30 September 2006 with a positive inflow of RM2.5 million compared to a deficit of RM7.3 million in the previous corresponding period.
The covenant was breached for the Bank Guarantee agreement on the debt to equity ratio which stood at 1.75 times against the covenanted level 1.5 times. The increase in the debt to equity was mainly attributable to the continued losses which has eroded the group’s shareholders funds from RM51 million to RM37 million in year 2005. In respect of this, the issuer has written to the bankers to seek indulgence from the guarantor banks and other related institutions on the inability of CNLT to meet the financial covenants as stipulated in the Bank Guaranteed Commercial Papers/Medium-Term Notes programme agreement.  

In the near-to-medium-term, MARC believes that CNLT’s operating environment will remain difficult due to the sluggish demand from its US based customers, increased competition from China as well as other operational factors.

Nevertheless, the bondholders can take comfort that the bonds are bank guaranteed and therefore are assured of the repayment based on the scheduled redemption dates. Judging from the poor financial performance, it is likely that the Bank Guarantee will be called upon to repay the bonds to the respective bondholders. Hence CNLT has written to the Guarantor Banks to term out the Bank Guarantee that will be crystallized. In addition, the bilateral borrowings amounting to RM66 million will also be restructured. The company is proposing to defer the payment due during year 2006 to 2010 and thereafter. The group has not defaulted in any interest payment as at to date, hence the directors are confident of obtaining the indulgence from the bankers.