MARC has downgraded its ratings on Medi Innovation Sdn Bhd’s (MISB) RM100 million Islamic Medium Term Notes Issuance Facility (IMTN facility) and RM50 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes Issuance Facility (MUNIF/IMTN) to BBBID and MARC-3ID/BBBID from AID and MARC-2ID /AID, respectively. The ratings remain on MARCWatch Negative. MISB operates a chain of aesthetic clinics in Singapore and Hong Kong through its wholly-owned subsidiary, Astique Medical Pte Ltd (AMPL). The rating actions followed MARC’s review of the statutory financial statements of MISB and AMPL for the year ended December 31, 2008 (FY2008) and takes into consideration its apparent reliance on its debt exchange offer and further indulgence sought from noteholders to defer profit due on the rated facilities to avoid immediate default. Driving factors in the current ratings determination include MISB’s consolidated loss for FY2008 and its declining credit protection measures, as well as the persistence of uncertain business prospects and subsequent absence of visibility on its earnings and cashflow. Of rating concern is the need to complete MISB’s restructuring of the rated facilities in a timely manner, as highlighted by the recent deferment of its profit payment for the second time. The ratings were first placed on MARCWatch Negative on June 17, 2009 to highlight concerns surrounding MISB’s ability to generate sufficient operational cash flow to meet its March 2010 RM20 million IMTN redemption arising from the departure of AMPL’s lead practitioner and founder as well as its more onerous profit sharing arrangements under its joint ventures in Hong Kong.

MISB is proposing to restructure the rated facilities by way of conversion into loan stocks of up to RM254.85 million, comprising redeemable convertible secured loan stocks (RCSLS) of up to RM235.85 million and redeemable convertible unsecured loan stocks (RCULS) of up to RM19.0 million. The proposal is still pending approval from the regulatory bodies. MISB was recently granted a further extension for the RM2.0 million profit payment due on September 22, 2009, supposedly to be rolled into new loan stocks to be issued as part of MISB’s debt exchange offering. Noteholders have consented to a deferment of the profit payment to December 31, 2009 or the date of issuance of its loan stocks, whichever earlier.

For FY2008, AMPL group recorded a lower than projected revenue of RM38.3 million (SG$15.9 million; FY2007: SG$15.0 million), and a sharply reduced operating profit margin of 22% (FY2007: 54%) on account of the departure of its lead practitioner in Singapore. Pre-tax profit was down by 55% to RM8.4 million (SG$3.5 million; FY2007: SG$7.7 million), mainly as a consequence of higher operating expenses and staff costs. In line with lower pre-tax profit, AMPL’s cash flow from operations fell to RM10.1 million (SG$4.2 million; FY2007: SG$6.3 million). MISB’s and AMPL’s financial results for the six-month period ended June 30, 2009 are not available yet, preventing an assessment of MISB’s compliance with its financial covenants under the rated facilities and the magnitude of its liquidity shortfall.

MARC expects to withdraw its ratings on the IMTN and MUNIF/IMTN programmes subsequent to the completion of its debt conversion exercise.

Contacts:
Rajan Paramesran, 03-2090 2233/ rajan@marc.com.my;
Elea Nor Zainal, 03-2090 2263/ elea@marc.com.my;
Katherine Hee, 03-2090 2273/ hcmay@marc.com.my