MARC has downgraded its rating on Englotechs Holding Bhd’s (Englotechs) RM50.0 million Murabahah Medium Term Notes Programme (MMTN) to BBB-ID from BBB+ID. Englotechs’ rating has also been placed on MARCWatch Negative. The downgrade reflects continued deterioration in Englotechs’ financial risk profile. The Company is in breach of its Finance to Net Tangible Assets Ratio (FNR) covenant and is at risk of a further covenant breach in relation to its obligation to restore the Finance Service Reserve Account (FSRA) balance to its minimum required level. Englotechs is required to restore the FSRA balance by April 4, 2008.

Englotechs is involved in the manufacturing and trading of cotton gloves, primarily industrial work gloves for the manufacturing industry. Its manufacturing facilities are located in Padang Meha Industrial Estate, Kedah and Lianyungang, China. Tough operating conditions in 2007 stemming from intense competition pressures from China’s low cost cotton glove manufacturers resulted in a precipitous decline in credit protection measures and a subsequent breach in its FNR covenant.  As at June 2007, Englotechs’ FNR deteriorated to 1.45 times, exceeding the covenanted cap of 1.35 times. Although Englotechs obtained indulgence from noteholders to remedy the breach, the covenant breach remains unresolved. It has not been able to remedy the breach within the specific time period, i.e. by March 17, 2008.

Since MARC’s downgrade of Englotechs rating to BBB+ID   from AID   in September 19, 2007, the Company’s liquidity position has deteriorated further. On March 26, 2008 Englotechs was unable to meet its semi-annual coupon payment of RM1.72 million from its Profit Service Reserve Account (PSRA). Consequently, funds in its FSRA were used for the profit payment. Englotechs has one month to replenish the FSRA. As provided under the terms of the MMTN issuance, MARC understands that Englotechs is in the midst of seeking an extension of time, beyond the April 4, 2008 deadline to restore the FSRA to its minimum required balance. Noteholders are in a position nevertheless to declare an Event of Default (EOD), and accordingly, declare the entire facility due and payable. No EOD has been called to date.

Resolution of the MARCWatch Negative and the maintenance of the rating depend on Englotechs’ success in obtaining appropriate waivers from noteholders and to eliminate near-term liquidity concerns.