MARC has downgraded the rating of Stenta Films (Malaysia) Sdn Bhd’s (Stenta) RM90 million Murabahah Notes Issuance Facility (MUNIF) from MARC-3ID to MARC-4ID.The rating also remains on MARCWatch, with negative implications. The rating action is premised on recent representations by the company that it intends to refinance the facility. This leads to concerns over the company’s ability to successfully do so, in view of Stenta’s previous inability to meet scheduled payments in a timely manner as evidenced by previous rescheduling requests.

Stenta’s rating was put on MARCWatch with a Negative Outlook on 16 June 2006 when the company approached note holders to consider a 2nd proposal to reschedule its debt after an earlier proposal was approved by Note holders in August 2005. Note holders rejected the proposal and Stenta on 29 September 2006 aborted the plan and redeemed and cancelled RM3.0 million of the MUNIF notes in accordance with the initial rescheduling. MARC had on 29 December 2006 extended the MARCWatch Negative on Stenta following ABRAR Discount Berhad (ABRAR)’s announcement on its cessation of operations, Abrar being the sole underwriter.

Stenta is the leading domestic Biaxially Oriented Polypropylene (BOPP) film manufacturer commanding approximately 50% market share in terms of local production of BOPP film. On the back of strong operational and technical support from P.T. Argha Karya Prima Industry of Indonesia (AKPI), Stenta has been able to gain market share by producing better quality BOPP film. AKPI has more than 20 years of experience in producing BOPP film.

As refinancing of this facility now appears inevitable based on higher rescheduled back end payments and the inability of Stenta to meet these payments based on its projected cash flows, the risks surrounding Stenta’s ability to obtain refinancing are exacerbated. Liquidity risks, on the other hand, are alleviated by the maintenance of cash reserves in designated accounts i.e. when the MUNIF was issued, RM5.0 million was deposited into a Maintenance Account to serve as a liquidity buffer for note holders.

Despite reporting higher revenue in FY2005, Stenta’s profitability was affected by higher cost of sales, reflected in the lower pre-tax profit and operating profit margins. Despite the fact that two-thirds of the principal repayments are only scheduled in the sixth and seventh year of the MUNIF a scheduled principal repayment of RM7.0 million due in September 2007 is a concern while Stenta’s liquidity position is expected to weaken in the absence of a refinancing facility.