Feb 27 2012
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MARC revises DRB-HICOM Berhad's rating outlook to negative
A key rating issue for DRB-HICOM in the context of the Proton acquisition is the more challenging debt maturity profile that would result from acquisition-related interim financing decisions and the execution risk associated with plans to deleverage post-acquisition. DRB-HICOM is in the midst of obtaining sukukholders approval to revise the proposed utilisation of proceeds from sukuk issued under the rated IMTN programme. The sukuk proceeds will be used to part fund the acquisition of Proton as opposed to the pay-down of its bridging loan for DRB-HICOM's earlier acquisition of Pos Malaysia Berhad and other growth-related investments. The repayment of the aforementioned RM622.8 million bridging loan will be extended by a year, and DRB-HICOM will incur additional short-to-medium term debt to finance the MGO. MARC notes the heavy concentration of debt maturities in FY2014/15 that will occur as a result of the financing decisions, and significantly diminished financial flexibility on the part of DRB-HICOM.
DRB-HICOM's debt-to-equity is expected to increase to 0.64 times on a pro-forma basis respectively following the completion of the transaction, which is weak for the current rating. DRB-HICOM's consolidated cash flow protection measures would foreseeably come under pressure without a commensurate increase in cash flow generation. MARC's preliminary assessment of DRB-HICOM's post-acquisition cash flow metrics indicates a weakening of coverages to levels that are no longer consistent with the current rating. While MARC understands that the holding company plans to place its financial profile on a more sustainable footing by undertaking asset disposals, in particular the divestment of a 30% stake in Bank Muamalat Berhad and insurer Uni Asia Capital Sdn Bhd, execution risks are noted given the general uncertainty around the timing of the targeted asset disposals.
MARC expects to resolve the negative outlook within the next six months after the closing of the acquisition. The rating agency expects to have greater clarity with respect to the strategic merits of the acquisition including potential synergies to be derived, and Proton's expected future level of cash flow generation and profitability by such time. MARC's review will also consider the challenges associated with integrating Proton's operations into DRB-HICOM's automotive operations and the expected timeline to realise meaningful synergies. The rating could be lowered if DRB-HICOM is unable to substantially reduce its debt in order to stabilise the rating outlook. Alternatively, the outlook could revert to stable if the group's post-acquisition earnings and cash flow generation measures suggest there is no material deterioration in the group's business and financial risk profiles, and DRB-HICOM successfully deleverages within the communicated timeline.
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