MARC has downgraded the rating of Tracoma Holdings Berhad’s (“Tracoma”) RM100 million Al Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) from A ID to BBB+ ID with a negative outlook. The rating downgrade is underpinned by the current negative domestic automotive industry outlook reflecting weak industry fundamentals which MARC believes will have an adverse impact on Tracoma’s future operating and financial performance, particularly as a large portion of its revenues is dependent on the sales performance of the national cars. Moreover, the domestic automotive industry is increasingly subdued by tightening credit practices as a result of more stringent approval requirements for hire purchase loans and relatively higher interest rates imposed on used vehicles financing. This is further aggravated by depressed used car prices and cautious consumer sentiment arising from higher petroleum prices. The sluggish outlook surrounding the domestic automotive industry has certainly affected most of the local automotive parts and components manufacturers as their businesses are closely linked to the local automakers. Nonetheless, moderating the concerns include Tracoma’s status as a Tier-One supplier to the local automotive industry and an issue structure that prioritizes payments relating to the BaIDS over Tracoma’s operating expenses.

In October 2006, Tracoma’s rating was placed on MARCWatch Developing premised on its failure (in accordance with the BaIDS Terms and Conditions) to deposit the monthly build up pertaining to the Profit Service Account required for the scheduled profit payments in January 2007, and pending the outcome of the proposed disposal of Tracoma’s 49% stake in PT Proton Tracoma Motors (PTPTM) to PROTON. On 29 January 2007, MARC received confirmation from Pacific Trustees Bhd that Tracoma had successfully redeemed the Secondary Notes of the BaIDS due on 26 January 2007. Also, on 30 January 2007, MIDF Amanah Investment Bank Bhd announced that Tracoma had entered into a conditional sale and purchase agreement with PROTON for the proposed disposal of its entire stake in PTPTM which is expected to be completed in the current fiscal year.

Two main subsidiaries in the Tracoma Group, namely Tracoma Sdn Bhd (TSB) and Profen Sdn Bhd (Profen), manufacture and supply metal-based and tubing parts components/modules to PROTON and PERODUA. PROTON is the Group’s biggest customer and accounts for 60% to 70% of the Group’s total annual sales. As previously mentioned, Tracoma’s financial performance over the medium term is expected to experience an adverse impact due to its heavy reliance on PROTON.

Based on the nine months unaudited results of FY2006 (9MFY2006), Tracoma registered a pre-tax loss of RM2.1 millon attributed to higher operating expenses compounded by weak demand from its major customers. In view of the losses incurred and higher borrowings, debt leverage increased to 1.85 times as at 9MFY2006 (FY2005: 1.79 times). Tracoma’s borrowings as at end-September 2006 totalled RM189.8 million. Going forward, debt to equity ratio is anticipated to worsen due to the expected loss of RM4.1 million arising from forex losses as a result of the proposed PTPTM disposal. Notwithstanding, a maximum leverage of 2.0 times has been imposed under the BaIDS issue structure. Meanwhile, Tracoma’s cash flow position appears to be tight, due to higher finance cost as well as the large development expenditure incurred. In tandem with the deteriorating PROTON car sales experienced in fiscal 2006, Tracoma’s slower debt collection had caused trade receivables to rise by 15% to RM45.3 million with higher receivables turnover of 130 days (FY2005: 109 days).