KUALA LUMPUR (June 3): Fitch Ratings has downgraded Serba Dinamik Holdings Bhd's Long-Term Issuer Default Rating to 'B-' from 'BB-', following questions raised over the quality of its earnings by its auditor. The rating agency has also downgraded Serba Dinamik's senior unsecured sukuk due 2022 and 2025 to 'B-' from 'BB-', with a Recovery Rating of 'RR4'.
The ratings have been placed on Rating Watch Negative (RWN), Fitch said in a statement. The downgrade reflects the pressure on Serba Dinamik's liquidity and the elevated refinancing risk from its short-term debt maturities in 2021 and its US$222 million sukuk due May 2022, Fitch said.
“We believe the company's access to debt funding has been compromised after its auditor, KPMG, requested an independent review when a 2020 statutory audit raised multiple questions over the company's operations. The RWN takes into account the plans for the independent review and the uncertainty over the completion of the review, and the limited time to maturity of its bonds. We expect to resolve the RWN following the completion of the review and the company demonstrating it has access to funding to enable it to refinance its upcoming debt maturities,” it said.
While Serba Dinamik has indicated it plans to complete the review within one month, Fitch believes the process is generally complex, necessitating ground checks to ascertain accuracy, which may take longer than anticipated. It also believes the issues raised by KPMG and the review will constrain Serba Dinamik's ability to access capital markets to manage its liabilities.
“We think the company had strong access to multiple forms of capital before the KPMG findings, which, combined with its proactive refinancing strategy, would have enabled it to refinance its short-term debt and undertake liability management. However, the independent review has hurt its ability to address its short-term maturities, resulting in the multiple-notch downgrade,” it said.
Fitch believes Serba Dinamik's top priority under these circumstances will be to ensure the continuity of its operations. “In our opinion, cash will be deployed to ensure that its oil and gas service contracts are carried out smoothly, rather than servicing or redeeming debt. Serba Dinamik has indicated that its banks have not frozen or withdrawn any facilities to date. However, it may face limited access to funds if the independent review reveals any anomalies,” it said.
Fitch also noted that Serba Dinamik's working capital needs surged to RM1 billion in 2020, from the rating agency's earlier projection of about RM420 million, due to a disproportionate increase in inventory. "We estimate that even if Serba Dinamik reins in its dividend distribution, its working capital and capex needs will use up cash of about RM90 million to RM100 million per month. Hence, Serba Dinamik is reliant on increasing working-capital facilities to smoothen operations and bridge the time lag between the rendering of its services and the receipt of cash," it added.
Serba Dinamik shares closed one sen or 1.21% higher at 83.5 sen today, valuing the group at RM3.07 billion. The counter has tumbled 48.14% since the audit issues were made public.