Renong: Dead Man Walking

Why the bailout should scare you? Flashback to 10 March, Malaysian Business Times: Renong Bhd's debt restructuring plan should augur well for the bankingsystem, as well as for Renong and United Engineers (M) Bhd, FirstFinance Minister Tun Daim Zainuddin said. "It should be good. Now you have taken away all the loans, and thecreditors will be happy to get back their 100 percent," he toldreporters after a luncheon with Formula One race driver MikaHakkinen in Kuala Lumpur yesterday.Also, Daim said, the Government does not need to guarantee the dealand, therefore, Renong's debt restructuring plan is not a bailout bythe Government of Renong or UEM. Oh, really? Call us cynics, but freeMalaysia isn't buying Daim's mendaciousclaims. And, if Mr. Hakkinen were a Renong shareholder, we bet hewould have lost his lunch right there. The whole Renongrestructuring is a massive mortgaging of Malaysia's future that willloiter menacingly in the background of the Malaysian economy andmarkets for seven years. Then will come time to pay the piper - andsuch a high price it will be. What's worse, this restructuring proves that it's business as usualfor Renong and its UMNO patrons. The approach is taken right fromthe playbook of Renong's go-go days, as if the current economiccrisis didn't exist. freeMalaysia shudders to think how often thisformula will be applied in the year ahead to other bloated anddiseased political companies. The cost may well be crippling for theeconomy. The deal solves nothing ... Let's cut through all the restructuring double-talk: Imagine a shell game. Under one shell is RM8 billion in bad debt thatRenong can't make payments on. Under another shell is RM8 billion inbonds from the same group. You swap what's under the first shell forthe second. Are you better off? If your answer is "yes," listen up. And if you're a UEM shareholder,scream bloody murder.The deal boils down to Renong and UEM exchanging about RM8.4 billionin short-term debt that they can't repay, or even service, forlong-term bonds. Now, the principle behind this restructuring isn'tnew. Refinancing of debt is going on all over Asia and has markedprevious Latin American debt crises. But, this deal is not about spreading out interest and principalrepayments over more time. No, there are no interest and principalpayments - rather, there's just one, when the bonds come due inseven years. Then, Renong and UEM get a RM16.6 billion bill. That'sright, twice the money they raise from the bonds. Zero-coupon bondsdon't mean no interest - just that 10% a year is piling up to bepaid at the end of 7-years. In financial circles, the concept iscalled, quite aptly, a bullet repayment. And fM knows which way thegun is pointing. ... and costs too much More to the point, private debt workouts usually require that lendersaccept losses as part of getting the restructuring completed, the lossbeing fair penalty for stupid credit decisions. In Renong's debtrestructuring, existing creditors get all their money back. Why?Foreign creditors were threatening to take Renong to court, not inMalaysia, but overseas. The prospect of that public airing wasevidently enough to seriously alarm the Mahathir government. At least the Malaysian creditors also benefit from the full bailout,right? Uh … not quite. You see, existing lenders to the group arebeing repaid with a mixture of cash and new bonds issued by UEM's maincash cow, PLUS. It turns out that the most of the cash is going toforeigners, while Malaysian lenders get stuffed with most of the PLUSbonds. Where is PLUS getting the cash? Well, it's selling more bondsto domestic financial institutions to raise the money. It is rich irony that, as Dr. M tries to whip Malaysians into apatriotic frenzy against pillaging foreigners, his finance ministerengineers a financial scam that abuses Malaysian financialinstitutions into bailing out foreign creditors. Why blame the IMFwhen there are the homegrown likes of Daim? In fact, the impact on the nation's foreign exchange reserves won't besmall. About half of the RM8.4 billion in debt Renong is"restructuring" is foreign held. Roughly two-thirds of that will bepaid in cash; the rest will be paid in PLUS bonds that foreigners arelikely to hold just long enough to scream SELL! It adds up to morethan RM4 billion leaving the country. PLUS bonds - a force-fed diet of junk What will be left behind? The PLUS bonds. Let's take a closer look atthem. PLUS is guaranteeing the bonds. Trouble is, PLUS isn't worth RM8.4billion - even after having the North-South Highway toll concessionextended by another 12 years. Estimates vary, but bond holders wouldbe lucky if PLUS were worth RM6 billion. Loading PLUS with more debtis like mortgaging your house twice over. Already 90 sen from everyRM1 of tolls goes towards servicing old borrowings to build thehighway. That's why existing creditors of PLUS have not yet endorsedthis latest rescue plan. That's OK, PLUS alone isn't supposed to repay the bonds; Renong andUEM are. How? Well, the group wants everyone to believe that it willrestore the value of its assets, expand its business, and boostefficiency - and then sell it all (or almost all) off to pay theRM16.6 billion in 2006. Right now, those assets are worth about RM8b,and that's before deducting the several more billion in debt remainingat other group affiliates like Putra, Prolink, Time Engineering,Faber. Watch for their bailouts, too. Now Halim Saad may be working with some low-wattage equipment, but ishe really going to spend all that effort to double the value of hisassets to pay off double the debt Renong owes right now? He could justsell it all right now, be done with it and walk away to his villa inUruguay. The deal just doesn't add up, and that would make anybodyholding the PLUS bonds jumpy. So where's the bailout? This is where the government bailout really comes in. After all this,what responsible financial institution would buy the PLUS bonds?Fortunately, the Renong group has the help of the completely impartialDaim Zainuddin, who - along with Bank Negara - is arm-twisting localbanks, insurance companies and pension funds (pretty much the wholeMalaysian financial system) into coughing up the cash required. The government has given bond buyers incentives: PLUS bonds will count towards banks lending targets. But this willcrowd out other needy borrowers, as Anwar Ibrahim has already noted.Instead of RM8.4b to one crony, these banks could have extendedhousing mortgages of RM150,000 each to 55,000 worthy individuals. No mark-to-market. Banks can classify the bonds as long-terminvestments, and accrue a full 10% imputed interest each year - evenif the bonds are trading at deep discounts in the secondary market. Any one bank isn't supposed to expose more than 30% of its capital toa single borrower. But PLUS bonds are - you guessed it - exempt. New investors into PLUS bonds are, yep, exempt from capital controls.Maybe George Soros will buy some? It's no longer a surprise why Daim (never the upright publiccustodian) has been hurrying along the whole banking system'srestructuring. The Mahathir regime bailed out Malaysian banks so thatthe banks would be able to bail out its cronies without the politicalfallout. And mind, this whole ugly cycle stands a high chance of beingrepeated in seven years time. Business as usual in boleh-land The only way to buy this whole deal is to buy the old standby ofbusiness in Mahathir's boleh-land.It goes like this: Renong's political credentials are Triple A.There's no way in the world that Mahathir will permit the group tocollapse. Sweet government contracts and discounted state assetswill flow Renong's way during the life of the bonds to ensure notonly their repayment, but to also leave a little something for itsshareholders. And if that's not enough, hit the Malaysian public byraising either tolls or taxes or borrowing away their retirementfunds. Never mind that such maneuvers are precisely the sort of shenanigansthat landed Malaysian in today's economic mess. Will Mahathir & Gangever learn their lesson? More important, who's to say that Renong's current benefactors willbe around long enough to make good on their implicit pledge to bailout the group? Seven years is a long time. In the current politicaluncertainty, it's eternity. So, freeMalaysia isn't putting its moneyon the Renong Express; it's nothing more than a bullet train tonowhere. Dead Man Walking. Dissecting the deal:A detailed appendix on Renong's restructuring efforts The debt of the entire Renong group totals about RM30 billion, or7% of all Malaysia's bank loans. Come June 1999, some RM8.4b ofborrowings by Renong and 38%-owned United Engineers Malaysia will bein default. If the proper course of bankruptcy were allowed to run,Renong (which is already in default on a number of loans) wouldalready be in receivership by now; liquidators would be conductingasset sales (perhaps back to the Malaysian government at attractiveprices); and Halim Saad would be jobless - if not exactly poor. Ifthe asset sales fell short of covering total liabilities, Renong'screditors would take the haircut. In this story, the potential winner is the Malaysian government(that's you and me), which gets to buy back cheaply assets ofnational importance. The losers are Halim Saad, his benefactor DaimZainuddin and foolish lenders. That would be the free marketplace atwork. Instead, back in October 1998, Renong proposed that the governmentguarantee a RM10.5b bond issue that would be used to re-financeoverdue loans. That failed - thanks to political protests againstgovernment-funded bailouts.The second proposal, announced on 8 March 1999, seeks to avoid thepolitical problems by getting the government to provide indirectsupport. Toll operator PLUS will issue RM8.4b of zero coupon bondsthat yield 10% and mature in seven years. PLUS would then on-lendthe proceeds - RM5.4b to Renong and RM3b to UEM - to pay off theirexisting creditors. Secured creditors, owed RM5.2b, get fully repaidin cash, while RM3.2b of unsecured creditors get paid half in cashand half in PLUS bonds. Come June 2006, PLUS must find RM16.6b cash to redeem these bonds. http://freemalaysia.com