ECM Libra Investment Research downgraded GENTING BHD to a hold after the company announced it would set up a RM1.6 billion medium-term notes (MTN) programme through a special purpose vehicle (SPV).

In a note, it said it was maintaining its target price of RM7.61 for the stock and would make no changes to its earnings estimates for now, as it was yet unclear to what extent the exercise would increase Genting’s leverage.

The research firm noted that the MTN, to be issued over a period of 15 years, would be guaranteed by Genting with proceeds to be used for capital expenditure (capex), investment, refinancing and working capital requirements.

“The refinancing will include loans taken to part-finance Genting’s entitlement for the rights issue by its 54% subsidiary Genting Singapore (GENS),” it said, adding the rights issue was expected to be completed within this month.

GENS had on Sept 9 proposed a renounceable underwritten rights issue of up to two billion new shares at S$0.80 (RM1.96) each on the basis of one rights share for five existing shares.
“To fulfil its entitlement, Genting is expected to fork out RM2.16 billion for its portion of the rights issue,” it said.

It added, however, there had been no indication so far as to how much Genting would draw down from the MTN programme to refinance loans taken up to fund the rights issue.

The research firm said as at end 4Q08, Genting had RM310 million in cash, deposits and money market instruments at company the holding company level, but on a consolidated basis it had a sizeable net cash holding of about RM2 billion.

“This suggest that Genting has just about enough to fund the rights issue and perhaps would require some borrowings for working capital purposes,” it said.

It said that asssuming financing cost of 5% and the entire drawdown of the MTN programme, Genting would incur finance costs of RM80 million per annum, the equivalent of two sen a share.

“In view of Genting’s significant cash pile, we believe Genting will likely issue only half of the MTN programme (RM800m) initially beginning next year which will result in FY10 and FY11 EPS decreasing by approximately one sen each year,” it said.

Genting fell four sen to RM2.73 last Friday  with 23.69 million shares done.