MARC has downgraded its AIS and A-IS ratings on Dawama Sdn Bhd’s (Dawama) RM120.0 million Senior and RM20.0 million Junior Sukuk Musyarakah Medium Term Notes Programme respectively to BIS and has concurrently placed the ratings on MARCWatch Negative. Both ratings were on negative outlook prior to the downgrades. The equalised ratings on the Senior and Junior Sukuk reflects MARC’s view that the earlier one-notch rating differential between the facilities is no longer meaningful. The ratings downgrade and MARCWatch placement reflect Dawama’s increased vulnerability to non-payment. The publisher of school textbooks is currently in breach of its gearing covenant and has been unable to meet its scheduled sinking fund payments. The rating actions reflect MARC’s assessment of Dawama’s ability to meet its forthcoming Senior Sukuk redemption of RM20 million in April 2011 in light of its limited liquidity and financial flexibility, ongoing negotiations with sukukholders, the continued vulnerability of its operating performance to delays in national curriculum school textbook changes, and its untenable capital structure.

Dawama has continued to incur pre-tax losses of RM14.3 million for unaudited financial year ended September 30, 2010 (FY2010) (FY2009: -RM28.4 million (17 months)) mainly due to significantly lower-than-expected orders for publishing school textbooks as a consequence of delays in the national curriculum and textbook revision processes. Departures from previously established textbook revision cycles have significantly affected the reliability and predictability of Dawama’s earning stream under a 12-year concession to print school textbooks on behalf of statutory entity Dewan Bahasa dan Pustaka. There is a high probability that the company’s operating performance will not improve over a short period of time.

Dawama’s balance sheet on September 30, 2010 shows a RM9.8 million deficit in its shareholders’ funds. Its capital structure had deteriorated rapidly as a result of consecutive year losses. MARC notes that the company has not been able to build up its sinking fund account (SFA) to meet its principal redemption of RM20 million under the MMTN programme on April 27, 2011. MARC understands that Dawama is in negotiations with sukukholders to seek forbearance on the covenant violations and to reschedule sukuk repayments.

MARC will continue to closely monitor the outcome of negotiations between Dawama and its sukukholders and take appropriate rating action.

Contacts:
Darrell Lim, +603-2082 2261/ darrell@marc.com.my;
Rajan Paramesran, +603-2082 2233 / rajan@marc.com.my.