MARC has lowered its ratings on Boon Koon Group Bhd’s (Boon Koon) RM100 million Islamic Commercial Papers (ICP)/Islamic Medium-Term Notes (IMTN) to MARC-3ID/BBB-ID from MARC-2ID/A-ID, and removed the ratings from MARCWatch.  The downgrade reflects Boon Koon’s weakened financial profile stemming from a period of very challenging industry conditions, its limited financial flexibility and its unremedied breach of its gearing covenant under the rated notes.  The rating outlook is negative as a result of uncertainties surrounding its proposed business reorganisation and debt restructuring initiatives as well as the limited visibility on Boon Koon’s business outlook.  Although some confidence is returning in the commercial rebuilding market, the rate of recovery is unlikely to provide the necessary revenue growth to alleviate the pressure on Boon Koon’s financial profile in the near-term.

Boon Koon is principally involved in the rebuilding and reconditioning of used commercial vehicles.  Boon Koon’s commercial vehicle rebuilding operations were affected by a six-month freeze on the import of used commercial vehicles during the second half of 2008.  Weak market conditions have compounded the difficulties experienced on the regulatory front, as reflected in its reported pre-tax loss of RM60.9 million for the 15 month period ended March 31, 2009.  Cash flow protection has weakened, reflecting Boon Koon’s lengthening cash conversion cycle.  Inventory turnover and receivables turnover deteriorated to 313 days and 212 days respectively, based on reported 1Q2010 results.  Boon Koon recorded negative cash flow from operations for the 15 month period ended March 31, 2009.

Meaningful recovery in Boon Koon’s credit metrics would hinge on a significant pick up in its trading prospects.  Boon Koon’s recent trading volumes, meanwhile, continue to reflect a challenging operating environment.  For 1Q2010 ended June 30, 2009, BKGB reported a revenue of only RM23.1 million and pre-tax loss of RM0.9 million.  On an annualised basis, the 1Q2010 results indicate a 38.7% drop in revenue against the 15 month period ended March 31, 2009.  Although 1Q2010 losses were not as severe as the preceding 15 month period, Boon Koon remained in breach of its gearing covenant on account of its reduced equity base of RM53.2 million and high total debt of RM162.4 million.  As at June 30, 2009, Boon Koon’s gearing stood at 3.06x against its gearing cap of 1.5x.  To date, the noteholders have yet to grant a waiver for the covenant breach.

MARC recognises that there is still some uncertainty associated with the proposed business reorganisation and debt restructuring scheme which is contingent on Boon Koon’s success in soliciting the requisite consent from its lenders to proceed with its plans.  Accordingly Boon Koon is vulnerable to the continued willingness of lenders to support its restructuring plan.  Uncertainties remain therefore as to whether the restructuring plan will fully materialise.  Any derailment or slower than expected progress in the implementation of the proposed scheme could have negative ramifications for its ratings.

Contacts:
Lee Mei Lin, 03-2090 2259/ meilin@marc.com.my;
Sabesh Parameswaran, 03-2090 2260/ sabesh@marc.com.my