MARC Ratings has downgraded its rating on TG Excellence Berhad’s RM3.0 billion Perpetual Sukuk Wakalah Programme to A+IS(cg) from AA-IS(cg). TG Excellence is a wholly-owned funding vehicle of Top Glove Corporation Bhd whose corporate credit rating was concurrently lowered to AA from AA+. Top Glove has provided an irrevocable and unconditional guarantee on the perpetual sukuk. The ratings outlook remains negative.
The rating action reflects continued weakness in Top Glove’s financial performance with sales volume and revenue showing no meaningful recovery since November 2022 (1QFY2023) when the outlook was revised to negative. During the nine-month period ended May 31, 2023 (9MFY2023), Top Glove recorded revenue of RM1.8 billion and pre-tax loss of RM436.1 million (9MFY2022: RM4.6 billion; pre-tax profit of RM409.5 million). Earnings before interest, taxes, depreciation and amortisation (EBITDA) was negative at RM172.2 million. Demand remains weak, weighed down by excess stockholding, leading to a suppressed average selling price. The industry continues to face overcapacity amid stiff competition among domestic players and manufacturers in China, with the timeline remaining uncertain as to when supply-demand would be in balance.
In response to the current challenges, Top Glove has continued to implement cost-reduction initiatives that have included decommissioning old production lines, temporarily shutting down 17 out of its 48 remaining factories and reducing its workforce. The retreating natural gas prices globally — USD2.30/MMBtu in May 2023 (end-2022: USD4.48/MMBtu) — would support margin recovery. MARC Ratings views Top Glove’s sizeable liquidity of RM987.9 million as at end-May 2023, would support its operational and financial obligations in the near term. Its adjusted debt-to-equity (DE) and net DE ratios of 0.28x and 0.10x also provide headroom for funding requirements. The outstanding perpetual sukuk currently stands at RM1.18 billion.
The negative outlook will be revised to stable on sustainable improvement in cash flow metrics, including restoring CFO to debt coverage to above 0.2x over the near term. Conversely, the ratings would be lowered if recovery in business and financial performance is not meaningful enough to support key performance metrics that are commensurate with the rating band.