S&P Global Ratings downgrades Serba Dinamik’s credit rating


KUALA LUMPUR: S&P Global Ratings has downgraded Serba Dinamik Bhd’s credit rating on reduced funding access and put it on credit watch negative on rising refinancing risks.

It faces heightened refinancing risk of its US dollar-denominated RM900mil Sukuk due May 2022 because of weakened market access due to a pending special independent review.

“We believe the timing of Serba Dinamik’s announced special independent review to resolve issues found in an audit will complicate the company’s efforts to refinance nearly RM1.7bil in debt over the next 12 months,” it said.

S&P Ratings said it lowered to ‘B-‘ from ‘B+’ the long-term issuer credit rating on Serba Dinamik and the long-term issue ratings on the company’s guaranteed sukuks.

“We then placed the ratings on credit watch with negative implications.

“Our ‘B-‘ ratings consider that Serba Dinamik may have sufficient cash for operations until May 2022 should the company adopt cash-preservation measures, ” it said.

S&P Global Ratings said according to the company’s latest published figures, it had an unaudited cash balance of RM836mil as of Dec. 31,2020, and short-term borrowings of RM807mil.

On Monday, Malaysian Rating Corporation (MARC) placed its ratings of MARC-1IS/A+IS on Serba Dinamik’s RM500mil multi-currency Islamic commercial papers programme and RM1.5bil Islamic medium-term notes programme with a combined limit of RM1.5bil on MARCWatch Negative. The ratings were assigned on May 11,2021.

“The MARCWatch placement arose from issues pertaining to the group’s annual accounts for financial year ending December 31,2020. The rating agency notes that Serba Dinamik has addressed these issues in its recent briefing on May 29,2021, which include customer confirmation on sales transactions and trade receivables following matters raised by external auditor KPMG PLT on May 3,2021 pertaining to the statutory audit of the group for FY2020.

“MARC wishes to highlight that in its rating assessment on Serba Dinamik, the rating agency had incorporated the group’s unaudited financial statements for FY2020. The aforementioned issues have raised concerns on some of the group’s transactions for FY2020, hence the MARCWatch placement. Serba Dinamik is undertaking measures to resolve its audit issues for FY2020, which include the appointment of an independent reviewer for the issues raised on its accounts for FY2020, ” MARC said.

Below is the statement released by S&P Global Ratings:

Questions raised during KPMG PLT’s fiscal 2020 statutory audit of Serba Dinamik’s financial condition has prompted the company to appoint an independent third party to conduct this review.

We believe Serba Dinamik may face difficulties accessing international and domestic capital markets, at least until the review’s resolution.

This will consequently complicate Serba Dinamik’s ability to fund its operations and to refinance its upcoming debt maturities before May 2022.

We estimate the company has RM1.7bil in debt maturities prior to May 2022: RM600mil comprises short-term facilities reported at end-2020, RM900mil represents the sukuk maturing in May 2022, and the remaining RM200mil is long-term debt for amortisation.

This deviates from our previous expectation that the company would proactively fund its upcoming working capital requirement while maintaining sufficient liquidity. In our opinion, efforts to restore capital providers’ confidence in Serba Dinamik’s operations are likely to take months, even if the company completes the independent review.

With less than 12 months from the May 2022 maturity of its sukuk, the limited time frame to both refinance and complete the independent review creates significant uncertainty.

Our ‘B-‘ ratings consider that Serba Dinamik may have sufficient cash for operations until May 2022 should the company adopt cash-preservation measures.

According to the company’s latest published figures, it had an unaudited cash balance of RM836 million as of Dec. 31,2020, and short-term borrowings of RM807 million.

We estimate that about RM600 million of the short-term borrowings are short-term working capital facilities.

Incorporating in our estimates the RM508 million from the private placement of new shares in February 2021 and RM100 million of commercial paper issued on May 25,2021, the company should have a cash balance of about R1M billion as of end-May 2021.

Furthermore, we believe cost-cutting strategies like reducing capital expenditure and stopping dividends, teamed with rolling over short-term facilities in the near term, will provide sufficient funds for ongoing operations until the company reaches its maturity wall in May 2022.

The CreditWatch reflects the heightened risk of a downgrade by one notch or more if Serba Dinamik experiences delays in refinancing its short-term debt, or if it does not advance a credible refinancing plan for its 2022 sukuk.

We could also lower the ratings to ‘SD’ (selective default) if the company undertakes capital market transactions that we consider distressed, such as repurchases below par of outstanding securities in the secondary market.

Serba Dinamik may be able to sustain its credit quality in line with our ‘B-‘ ratings if it demonstrates improved access to funding and reduces refinancing risk. We aim to resolve the CreditWatch within the next 90 days.

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