S&P downgrades Serba Dinamik’s rating further to 'CCC' from 'B-' on growing refinancing risks

TheEdge Thu, Aug 19, 2021 05:36pm - 2 years View Original


KUALA LUMPUR (Aug 19): S&P Global Ratings has downgraded Serba Dinamik Holdings Bhd lower to “CCC” from “B-” previously to reflect the company’s sizable debt maturities of some RM1.7 billion within the next nine months. 

It also has a negative outlook on the company to reflect its view of the refinancing risk the company faces, given its weakened access to funding, coupled with sizable debt maturing in the near term. 

The ratings agency added that they see Serba Dinamik’s challenges surrounding the special independent review and statutory audit to be a roadblock to the company’s ability to get external sources of funding. 

“With less than nine months to its sukuk maturity, Serba Dinamik's ability to get external sources of capital hinges on a resolution of the special independent review, a timely completion of its statutory audit, and a restoration of market confidence in the company,” said the rating agency in a statement today.

The ratings agency said while the company has not revised its targeted fiscal 2020 filing, any further delays would mean that the company would be hard pressed to meet its articulated deadline.

It sees this as a “key stepping stone” in dispelling uncertainty and restoring confidence among capital providers. 

Serba Dinamik had appointed Nexia SSY PLT as the new statutory auditor of the company in August 2021, while Ernst & Young was appointed as the special independent reviewer of audit issues raised by ex-auditor KPMG PLT in July. 

Notably, Serba Dinamik’s stock and bond prices have declined about 75% and 60% to 70% respectively, said S&P. 

It does not see the company raising funds from the capital markets in the near term, as it believes that market confidence will take some time to be restored after the resolution of the special independent review and audit. 

“In our view, the company's decision to take legal action against the previous auditor, KPMG, further complicates its bid to restore market confidence,” it added. 

S&P highlights that in the next nine months, Serba Dinamik has maturing debts that include RM900 million in sukuk, RM700 million in loan amortisation of its long-term bank facilities and short-term facilities, and RM100 million of its commercial paper. 

The last reported cash balance as at March 31, 2021 of the company amounted to RM1 billion.

S&P estimates that Serba Dinamik will generate RM300 million to RM400 million in negative free operating cash flow over the 12 months ending June 30, 2022.   

The ratings agency says that it considers Serba Dinamik’s liquidity to be weak given its reduced access to funding, and forecasts that the company’s liquidity sources will cover less than 0.7 times near-term liquidity uses over the 12 month ending June 30, 2022. 

“We also consider that Serba Dinamik may need to spend RM400 million to RM500 million in long-lead time capital expenditures, which further limits the company's financial flexibility and raises its reliance on fresh funding for refinancing debt and business needs,” it further added. 

S&P also opined that the company has to overcome its governance deficiency, after five of its independent board directors resigned. This came after the company initiated a lawsuit against its former auditors KPMG. 

“In our opinion, this calls into question the effectiveness of the board in maintaining an independent oversight over the management. We believe the resignation of KPMG and Serba Dinamik's independent board members dilutes the possibility of an unequivocal resolution of the audit matters first raised by KPMG, because the initial independent third parties are no longer involved in the process,” said S&P.

The ratings agency also takes the view that the going concern and reputation of an engineering and construction firm are key considerations in a contract bidding process, implying that the company may face difficulties in the near terms in replenishing its order book, given its current situation.

A slowdown in orderbook replenishments would then lead to a decline in revenue, going forward.

S&P sees a downward rating pressure arising if Serba Dinamik is unable to demonstrate a refinancing plan for the upcoming maturities or roll over its short-term facilities, after the fiscal 2020 statutory audit. 

The ratings agency said it would also lower the rating to “selective default” if the company undertakes capital market transactions related to its notes that the former assess as a distressed exchange, including capital market purchases below par. 

Meanwhile, S&P may revise the outlook to stable if Serba Dinamik produces a credible refinancing plan for its debt maturities and can roll over its short-term facilities on a timely basis. 

At the time of writing, Serba Dinamik was half a sen or 1.19% to 41.5 sen, valuing the group at RM1.53 billion.

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