MARC has revised its outlook on the ratings on Goodway Integrated Industries Berhad’s (Goodway) RM80 million Murabahah Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/IMTN) of MARC-2ID/AID to negative from developing. The rating outlook revision takes into account Goodway’s gearing covenant breach and MARC’s expectation that the company's gearing would remain elevated in view of the weaker revenue environment, particularly with the recent significant downturn in demand for rubber compounds. MARC is concerned that the difficult market conditions could prevent its credit metrics from recovering to more adequate levels.  MARC is of the view that the sensitivity of the rubber compound and retread tyre manufacturer's credit profile to steep volume declines has increased over the past few years as a result of Goodway's recent significant capacity expansion.

When MARC last affirmed the ratings on February 27, 2009, its financial review of the rubber compound and retread tyre manufacturer had incorporated the company’s results for the nine-month period ended September 30, 2008. MARC had revised the outlook on the ratings to developing from stable on expectations that Goodway’s narrowing margins would see improvement with declining raw material prices while its gearing levels would be contained with an early debt redemption. Subsequent release of Goodway’s results for the financial year ended December 31, 2008, however, revealed a breach in its D/E ratio to 1.87 times arising from a RM13.5 million loss in the last quarter of fiscal 2008. Although the breach was temporarily cured in January 2009, Goodway’s first quarter results for the three-month period ended March 31, 2009 (1QFY2009) signalled recurrence of the covenant breach.

Goodway has reported losses for three consecutive quarters, its fourth quarter FY2008 loss of RM13.5 million being the consequence of a 29% quarter-on-quarter decline in revenues to RM39.7 million which was further compounded by write-downs totalling RM6.4 million incurred in relation to impairment and foreign exchange losses. Although the RM10.0 million redemption of MUNIF/IMTN in January 2009 resulted in its proforma D/E ratio declining to 1.71 times, it remains only marginally below its covenant threshold of 1.75 times. Its latest 1QFY2009 results meanwhile showed a smaller pre-tax loss of RM0.9 million amid the continued downtrend in compound sales and pricing. Although Goodway’s borrowings had reduced from December 31, 2008 levels, the effect of this on gearing was offset by the erosion in its equity base, which saw its gearing increase to 1.76 times.

Goodway has obtained the consent of the noteholders via circular resolution to rectify the gearing covenant breach by August 31, 2009. It proposes to remedy the breach through cost optimisation, reduced capex and disposal of non-operating assets. On March 18, 2009 the company announced the disposal of five units of its office suites for RM6.2 million emanating from its action plan to dispose non-operating assets.

MARC believes that near-term improvements in Goodway's credit profile will be constrained by its more difficult trading environment notwithstanding management's efforts to reduce capital spending and to offset the impact of lower sales through improvements in operating costs and efficiency.

Contacts:
Jason Kok, 03-2090 2258 / jason@marc.com.my;
Francis Xaviour Joe, 03-2090 2279/ fxjoe@marc.com.my