Fitch: Serba Dinamik debt downgraded on refinancing risk

by HARIZAH KAMEL / pic by TMR FILE

FITCH Ratings Inc has downgraded Serba Dinamik Holdings Bhd’s long-term issuer default rating to CCC- from B-, as well as the senior unsecured sukuk due May 2022 and March 2025 to CCC-, from B- with a recovery rating of RR4. 

All the ratings were removed from Rating Watch Negative (RWN), which was placed on June 3, 2021. 

Fitch stated that the downgrade reflects Serba Dinamik’s diminished cash reserves, stretched liquidity and heightened refinancing risk on short-term debt with RM100 million in commercial paper and US$222 million (RM921.3 million) in sukuk, both due in May 2022. 

“Serba Dinamik’s access to debt funding will continue to face challenges given the previous auditor requested an independent review — compounded by delays in the release of its audited financial statements. 

“The review is ongoing, and it is unclear when it will be finalised and, pending its satisfactory completion, Serba Dinamik has limited time to address its impending maturities,” Fitch noted in a research note on Wednesday. 

Trading of Serba Dinamik securities has been suspended since Oct 22 pending the release of the audit findings. The shares of the company were last traded at 35 sen a share. 

Fitch believes Serba Dinamik has sufficient cash for the RM99 million amortisation payment on a syndicated loan in December 2021 but liquidity will then weaken materially. 

It noted that Serba Dinamik’s cash reserves had declined to RM497 million by the end of June 2021 from RM1 billion at end-March. 

Fitch forecast free cashflow to be negative for the next three years because of Serba Dinamik’s high working capital requirements, and therefore additional funding for its business will further exacerbate its liquidity position. 

Serba Dinamik’s working capital remained high as inventories and plant property and equipment increased again during the second quarter of 2021 (2Q21). 

The company has continued to stock up inventories on-site to better carry out its service contracts, which has greatly diminished its cash reserves. 

Fitch noted that the company’s receivables were flat in 2Q21 compared to the previous quarter, indicating Serba Dinamik’s customer collections during this period could be slower than Fitch expected. 

“In contrast, payables declined, which could hint at supplier pressure for shorter payment periods and concerns with respect to reputation, which could affect successful bidding on new contracts. 

“Serba Dinamik’s working-capital needs will remain high as it relies on increasing working-capital facilities to smooth operations and bridge the lag between rendering services and the receipt of cash,” it said. 

For 3Q21, Fitch estimated that the company’s performance to remain muted, as its 1Q and 3Q are generally more subdued. 

Operations, however, should improve as Covid-19 restrictions are lifted and the business environment recovers. 

On Serba Dinamik’s ongoing and pending audited financial statements, Fitch expects the company’s access to credit facilities could be constrained as lenders become more stringent in requirements. 

Bursa Malaysia Securities Bhd has suspended the trading of Serba Dinamik shares and instructed the company to release a status update on the special independent review by Oct 26, 2021. 

Serba Dinamik was unable to meet Bursa Malaysia’s deadline, citing “the audit process remains in progress”. 

The company has since reassured its stakeholders that its trading suspension will not affect ongoing obligations and is “looking to put the arduous matters to bed”.