MARC has downgraded the rating on Mithril Berhad’s (Mithril) RM59 million Redeemable Convertible Secured Loan Stock (RCSLS) to B+ from BB. The lowered rating reflects the company’s continued pre-tax losses in the fiscal year ended June 30, 2008 (FY2008), its weak near-to-immediate term business outlook, and MARC’s concerns regarding its increased business and financial risks. Mithril’s recent decision to seek a waiver for its annual sinking fund payments for 2008, 2009 and 2010 in respect of the RCSLS highlights the severity of persisting cash flow and liquidity issues. The rating continues to carry a negative outlook since MARC’s last rating action in May 2008.

Mithril has been principally involved in the manufacture and sale of architectural mouldings, after a fire destroyed its brick-manufacturing facility in 2006. The bulk of its architectural mouldings are exported to the USA and Russia. But with its major market, the US, in a deep recession, Mithril’s architectural mouldings business is not expected to generate meaningful discretionary cash flow towards meeting its RCSLS-related debt service obligations. Currently, its only source of reliable cash flow is the rental proceeds from the two Malaysian Assurance Alliance (MAA) commercial buildings in Kuching, Sarawak and Kota Kinabalu, Sabah. The company intends to raise funds through the disposal of the eleven-storey MAA Kota Kinabalu (MAAKK) building.

For the financial year ended 30 June 2008 (FY2008), the company’s revenue declined a further 21% to RM37.8 million while pre-tax loss worsened to RM17.2 million (FY2007: RM15.2 million). Cash flow from operations (CFO) declined to RM2.7 million (FY2007: RM5.1 million) while debt-to-equity ratio increased to 1.90 times (FY2007: 1.30 times). For the six months ended December 31, 2008 (1HFY2009), the company continued to post pre-tax loss of RM7.0 million (1HFY2008: pre-tax loss of RM6.0 million) on revenue of RM13.2 million (1HFY2008: RM20.9 million).

On January 8, 2009, the bondholders approved variations to the Trust Deed and Security Deed of Assignment. The variations allowed the company the option to redeem any of the 2004/2012 RCSLS at any time before the maturity date of April 6, 2012; the partial redemption of the 2004/2012 RCSLS in cash by utilising monies available in the Sinking Fund Account (SFA); the removal of the requirement to contribute annually to its SFA for years 2008, 2009 and 2010; the disposal of the MAAKK building; and an increase in the security margin.

Apart from providing for immediate partial redemption of RM0.22 to the nominal par value of RM1.00 for each outstanding 2004/2012 RCSLS, the approved variations will entitle bondholders to additional coupon payment of 1.5% p.a. of the accumulated deferred SFA amount and allow for a marginal increase in the security margin to 1.50 times from 1.44 times the outstanding 2004/2012 RCSLS less the amount accumulated in the SFA. MARC views the deferment of sinking fund build-up payment with concern although it will contribute to improved near-term financial flexibility for Mithril, particularly in light of its current cash flow generation challenges. Mithril currently has RM12.85 million in the SFA, with an additional RM46.15 million needed to fully redeem the RCSLS by 2012. In the near term, without a meaningful recovery of its core business, the only source for repayment of the RCSLS would be the disposal of the MAAKK building which has a book value of RM75 million. However, given current macroeconomic conditions, realising the full book value of the building would be challenging.

Contacts:  
Khairul Muzamel Perera 03-2090 2247/ kevinkhairul@marc.com.my;
Francis Xaviour Joe 03-2090 2279/ fxjoe@marc.com.my