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Fitch Ratings-Taipei/HK/Tokyo/Singapore-08 June 2009: Fitch Ratings has today downgraded Taiwan-based S-Tech Corp.'s (S-Tech) National Long-term rating to 'CCC(twn)' from 'B+(twn)' and National Short-term rating to 'C(twn)' from 'B(twn)'. Simultaneously, Fitch has downgraded S-Tech's TWD160m five-year senior unsecured convertible bonds due June 2012 to 'CC(twn)' from 'B(twn)', with a recovery rating of 'RR5'.
"The downgrade reflects S-Tech's significantly deteriorated performance in 2008, as well as expected limited improvement of its credit metrics in 2009," says Kevin Chang, Director of Fitch's Industrials team in Asia-Pacific. "The debt financing for its extensive capex in 2008 materially increased its leverage when its profitability plunged due to higher raw material costs, reduced shipment volume and lower selling price, amid the industry downturn," adds Mr. Chang.
Leading to a one-notch difference against the National Long-term rating, the 'RR5' rating reflects below-average recovery prospects in the event of default. Assuming no sufficient conversion of the optional convertibles, Fitch expects potential recovery of its unsecured debt to be less than 30%, because 74% of its debt was secured against fixed assets at end-Q109.
S-Tech's revenues dropped 26.8% yoy in 2008 but increased 7.5% yoy in Q109. Its operating EBITDAR margin slipped to 2.7% and 3.5%, respectively, for 2008 and Q109, compared to 16% in 2007. Fitch expects the company's revenue growth to be less than 5% in 2009, with an EBITDAR margin continuing to be much lower than its historical average.
Fitch notes that S-Tech's free cash flow (FCF) for 2008 and Q109 was negative as a result of large capex, which amounted to TWD709m and TWD102m, respectively. The company's FCF for full-year 2009 is likely to remain negative. The TWD489m increase of bank debt in 2008 on top of weakened operating cash flow led to a material deterioration of its financial leverage, in terms of total adjusted debt net of cash/operating EBITDAR, which skyrocketed to 43.8x at end-2008 from 1.2x at end-2007. This is likely to remain as high as nearly 20x for 2009.
At end-Q109, S-Tech's TWD145m cash balance covered 42% of its TWD341m debt due within one year (including the above mentioned convertibles with investor put options on 25 June 2009). The company has already arranged additional mid-term bank loan facilities in May 2009, in preparation for the potential put back of bonds.
Fitch notes that S-Tech has a much smaller operating scale than its major global peers. The company also has high exposure to volatile feedstock prices, but lacks in-house supply of raw materials (which account for around 70% of production costs).
Established in May 2002, S-Tech is 33% - owned by Gloria Material Technology Corp. S-Tech is the only company in Taiwan to vertically integrate titanium material transformation, precision finish and component machining.
Contacts: Kevin C. Chang, Taipei, +886 2 8175 7609/
kevin.chang@fitchratings.com; Siew Huey Loong, Hong Kong, +852 2263 9914/
siew.huey.loong@fitchratings.com.
Media Relations: Lisa Lim, Singapore, Tel: +65 6796 7214,
Email:
lisa.lim@fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
