MARC has assigned a rating of A- to Press Metal Berhad’s (Press Metal) RM323.7 million Redeemable Convertible Secured Loan Stocks (RCSLS) with 147.2 million detachable warrants (warrants). The outlook for the rating is stable.  The rating incorporates the aluminium producer’s exposure to fluctuation in pricing and volume in domestic and export markets, particularly for its primary aluminium operations as well as its unprofitable smelting operations in China and its leveraged financial profile which is expected to persist as a result of capital spending to expand its primary aluminium capacity. Offsetting these risks at the ‘A-‘ level are the group’s access to low-cost hydroelectric power which enables Press Metal to improve its cost position and counter cost pressures while improving financial performance. The rating also reflects the adequate projected financial results and satisfactory sensitivity analyses for Press Metal Bintulu (PMBintulu) which is expected to generate the cash flows to service the rated debt and to maintain a debt service coverage ratio (DSCR) of 1.25 times (x) in respect of the rated debt. The rating is dependent on MARC’s assessment of Press Metal’s creditworthiness as well as that of PMBintulu.

The proceeds from the RCSLS offering will be on lent to wholly-owned subsidiary PMBintulu to part-finance the construction of the group’s second aluminium smelter in Samalaju, Sarawak. The 240,000 metric tonne per annum aluminium smelter will be developed in two phases, the first phase of which is expected to commence construction in the second half of 2011 and the second phase to be completed by end-2012. The RCSLS proceeds will be released progressively to fund the construction works. The RCSLS are equally and ratably secured with other senior debt to be incurred with respect to the RM1.5 billion Samalaju aluminium smelter. The security package for the aforementioned borrowings includes a first priority charge over project assets, assignment of its revenues and income, including but not limited to that from the Samalaju smelting project, as well as the subsidiary’s rights under the construction contract for the Samalaju aluminium smelter. Additionally, the RCSLS will benefit from a senior upstream guarantee provided by PMBintulu.

Press Metal is an integrated aluminium producer with a total combined annual smelting and extrusion capacity of 210,000 and 180,000 metric tonnes per annum respectively. Press Metal’s domestic aluminium extrusion business is one of the largest in Malaysia. Since 2005, Press Metal has ventured into the Chinese market; its primary operations in China are capable of producing 90,000 metric tonnes per annum of aluminium in 2010 and 140,000 metric tonnes of extruded aluminium products. The group is also aggressively expanding its smelting capacity in Sarawak, Malaysia. The Mukah smelter is currently operating at 70% of capacity; it is expected to operate at its full capacity of 120,000 metric tonnes per annum upon completion of the second phase in October 2011.

The group’s focus on upstream integration should enable it to improve its cost position and stave off margin and cost pressures. Currently, 25% to 30% of the group’s smelting capacity is used for internal consumption. The output of the Samalaju smelting project will be primarily sold on the open market.         

The revenue stream for the RCSLS is project-dependent; the issuer’s ability to meet debt-service obligations on the RCSLS will be dependent of the project’s performance and output. MARC believes that prior to the commissioning of the Samalaju aluminium smelter, the RCSLS is exposed to the risk of construction delays, cost overruns and start-up issues. Beyond the construction phase, the performance of the project will be sensitive to commodity price risk, demand cyclicality and potential erosion of costs advantages of the project over time.  Forecast DSCR in PMBintulu’s base case cash flow projections average 3.23x with a minimum of 2.15x. The base case also assumes price gains and full capacity utilisation. The projected cash flows demonstrate only moderate resilience to construction delays and weaker aluminium prices.

Press Metal recorded improved revenue and earnings for the 12 months to December 31, 2010 (FY2010) at the company level as well as the consolidated level. The improved results within the group were driven primarily by high aluminium prices and improved performance from its China extrusion operations. However, smelting operations in China continue to be plagued with losses following high production costs. The operating holding company reported revenue and operating profit of RM677.0 million and RM58.3 million, compared to RM556.7 million and RM56.6 million the year before. Consolidated results, meanwhile, benefitted from the combination of higher aluminium prices and the completion of the first phase of its Mukah smelting project in November 2009. 

The group’s capital spending on its aluminium smelting projects has and will continue to weigh heavily on its free cash generation and keep its debt leverage at elevated levels. Press Metal’s consolidated debt-to-equity ratio (D/E) of 1.47x as at end 2010 is expected to deteriorate further to a pro-forma D/E of 2.25x with the issuance of the RCSLS and PMBintulu’s drawdown of RM400 million bilateral term loan. Meanwhile, Press Metal Sarawak Sdn. Bhd., the subsidiary which owns the Mukah plant, has a total debt commitment of RM518.3 million as at FY2010 (FY2009: RM521.3 million). MARC notes as at 2010, a total of RM493.0 million in group borrowings (FY2009: RM558.6 million) are backed by holding company guarantees. The rating agency believes that that group’s high concentration in the aluminium industry and fairly aggressive financial leverage would increase its vulnerability to adverse developments in aluminium prices and demand. The guarantees provided by Press Metal also create a significant degree of linkage between the holding company and its operating subsidiaries other than PMBintulu. Accordingly, any meaningful deterioration in the financial profiles of supported entities could weigh on the rating of the RCSLS.
 
The stable outlook incorporates MARC’s expectations that construction of the proposed Samalaju plant will proceed as scheduled and that the improving general economic conditions would support positive underlying demand for aluminium.

Contacts:
Gazzara Czillich, +603-2082 2259/ gazzara@marc.com.my;
Rajan Paramesran,  +603- 20822233/ rajan@marc.com.my.