MARC has placed Boon Koon Group Bhd’s (Boon Koon) short- and long-term ratings of MARC-2ID/A-ID on its RM100 million Islamic Commercial Papers/ Islamic Medium Term Notes (ICP/IMTN) on MARCWatch Negative following a debt-to-equity covenant breach based on its unaudited balance sheet as at December 31, 2008 (FY2008). At end FY2008, the group’s debt-to-equity ratio had risen to 1.58 times compared to its covenanted level of 1.50 times mainly on account of its weak financial performance for FY2008 in which it incurred a RM12.6 million pre-tax loss. The loss, which caused Boon Koon’s equity base to contract by RM11.8 million as compared to end FY2007 was caused by reduced commercial vehicles sales; foreign exchange losses; and expenses incurred on winding-down loss-making subsidiaries. The MARCWatch placement also considers recent changes in management which emphasize the broad challenges facing the company.

Boon Koon is currently the only Bursa Malaysia-listed commercial vehicle rebuilding company in Malaysia, competing with 17 other non-listed players. The group’s plant situated in Nibong Tebal, Penang has a total built-up area of approximately 202,168 sq ft with an annual capacity to produce up to 2,400 rebuilt commercial vehicles. Given the weak operating environment, Boon Koon implemented several cost cutting measures including the delaying of construction of a new production facility in Terbau, Johor Bahru which has an initial capital outlay of RM9.3 million and a capacity to produce up to 420 rebuilt vehicles per year.

Apart from the group’s weaker financial performance in FY2008, its lengthening cash conversion cycle and current challenging trading conditions raise concerns over its cash flow generation ability and its capacity to address its covenant breaches in the near-term. Following the technical breach, Boon Koon has been issued a notice of breach by the trustee for its failure to comply with the financial covenants. Failure to provide explanation of the breach and action plans to remedy the breach of covenant within 14 days from the notice date of February 24, 2009 could result in a potential event of default and acceleration of debt repayment.

Contacts:
Hafizan Haron, 03-2090 2238/ hafizan@marc.com.my;
Lee Mei Lin, 03-2090 2259/ meilin@marc.com.my