MARC said today that there is no immediate rating impact on EP Manufacturing Bhd’s (EPMB) Islamic debt ratings of MARC-2ID and AID from its proposed acquisition of Maju Expressway Sdn Bhd (MESB) for a total consideration of RM1.7 billion. EPMB has RM10.0 million of notes outstanding issued under its RM120.0 million Murabahah Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/IMTN) programme, with RM5.0 million due respectively in August and November 2012.

While MARC believes that the largely debt-funded acquisition of MESB will negatively impact EPMB’s credit profile, completion of the acquisition is still subject to approval from a number of parties including the government, regulatory authorities and shareholders. Due to uncertainties surrounding the transaction, which EPMB targets to complete by the third quarter of 2012, MARC opines that no rating action is warranted at this stage.

Despite the benefits of additional diversification for the auto parts manufacturer, the acquisition will weigh negatively on EPMB’s gearing and cash flow coverage metrics in the short- to medium-term. EPMB is proposing to finance the acquisition of the concession holder of the Maju Expressway (MEX) through issuance of RM100.0 million Redeemable Unsecured Loan Stocks (RULS), a RM225.0 million term loan at EPMB level, in addition to RM1.3 billion of sukuk to be issued by a newly formed subsidiary, EPMEX Sdn Bhd (EPMEX). Based on its December 31, 2011 financial statements, EPMB’s pro-forma debt-to-equity ratio is expected to deteriorate to 5.5 times, taking into account the additional debt and new equity capital to be raised of RM50.0 million for the transaction.

If the acquisition completes as planned and prior to the redemption of EPMB’s outstanding rated notes, MARC may downgrade EPMB’s Islamic debt ratings on account of the deterioration in its net cash position as it employs its cash and bank balances of RM72.3 million to fund its equity investment in EPMEX, and the weakening of its cash flow coverage metrics in the more immediate term.

MARC will closely monitor whether the acquisition will successfully close and take rating action where warranted.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Sharidan Salleh, +603-2082 2254 / sharidan@marc.com.my.