MARC has downgraded the rating of Mithril Bhd’s (Mithril) RM59 million Redeemable Convertible Secured Loan Stocks (RCSLS) from BBB- to BB. The lowered rating reflects MARC’s expectation that Mithril’s weak operating performance will continue within the context of its very challenging primary export market of the US and rising raw material prices. Mithril’s operating losses have led to a deterioration in its balance sheet and leverage measures, and may result in a financial covenant violation. The rating carries a negative outlook.

Mithril’s principal activities include the manufacture and trade of architectural mouldings under Mithril Saferay Sdn Bhd (Saferay). In FY2007, the mouldings business contributed 85.0% to Mithril’s revenue whilst rental income from property investments accounted for 14.4%. The architectural mouldings are fully exported with the US and Russia accounting for 91% of moulding sales in FY2007. Mithril’s property investments are in the form of two commercial buildings in Kota Kinabalu and Kuching which are leased to related company, Malaysian Assurance Alliance Berhad (MAA). The recurring rental income provides a stable income stream to Mithril, of which some RM2.95 million is channelled into a Sinking Fund Account annually for the redemption of the RCSLS.

Mithril Group recorded reduced revenue of RM47.63 million (FY2006: RM64.51 million) and a pre-tax loss of RM14.82 million (FY2006: RM10.88 million losses) in financial year ended June 2007. Apart from weak demand from the US, the strengthening Ringgit against the US dollar contributed to a squeeze in the Group’s export sales margins.

Additional debt taken to finance working capital requirements in FY2007 coupled with the decline in shareholders funds on account of operating losses have caused the company’s debt leverage ratio to rise to 1.49 times as at end December 2007. The company is working to pare down borrowings by June 2008 to maintain compliance with the 1.50 times maximum gearing ratio covenant.

The negative outlook for the rating incorporates the limited room under its financial covenant and the considerable challenges that Mithril faces in meeting its debt service obligations with internal cashflow. Mithril met its latest profit payment with assistance from a related company, MAA Credit Sdn Bhd.