Economics & Strategy

Another round of S&P's rating cut, corporate bailout roils investors


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(for the week of 20-24 April 1998)

Another round of S&P's rating cut, corporate bailout roils investors

Policy backfires: What goodwill Malaysia has promoted and earned from investors with respect to corporate bailouts are now wasted in the mess of Malaysia Airlines' proposed restructuring. With the tacit approval to the MAS deal, the decision-makers have backpedalled on its policies to prevent bailout of troubled prominent businessmen. That couldn't have been more ill-timed, coming so soon after its recent pledges on corporate transparency and governance. That such a deal has been "approved" even before the shareholders' vote is something; to be given the accolades for roping in Technology Resources Industries (TRI) and Malaysian Helicopter Services (MHS) is detrimental to investors. Tajuddin Ramli's financial troubles can be traced to his June 1994's purchase of 32% stake in the national carrier for RM1.79b or RM8.00 apiece. That deal was later assigned to MHS for the same price by issuing new shares at RM5.00 apiece and RM393 cash. MHS was last traded at RM0.60.

That classic case of personal gearing is not without parallel; in Jan 1996, the late Yahaya Ahmad took on a RM1.72b debt to acquire 32% stake in Hicom Holdings from Khazanah Nasional. That Hicom stake was later sold to Gadek in exchange for new shares issued at RM10.00 each. Gadek traded at RM2.50 last week.

Profit shortfall - who are accountable? No less than two dozen of companies have been asked to explain their profit shortfall vs forecast/guaranteed profits contained in documents relating to their corporate exercises (IPO/rights/bond issues). The question is not about whether these companies achieved their numbers. Rather, it is whether blame can be conveniently and entirely assigned to "economic slowdown" or whether responsibility can be apportioned to poor management and/or reckless shareholders. Take the case of Zaitun Industries - a second board debutant only in June 1997. Details of the groupÕs results to Dec 31, 1997 is exemplary of what-not-to-buy in Malaysia: loss on disposal of quoted investments (RM6.9m) and stocks, presumably toiletries, written off RM10m and a grandiose RM405m investment plan for an eco island resort. How a company of such "qualities" passed through its screening is moot; enforcing those profit guarantees is paramount to sustaining confidence in the authorities and enhancing the proctection of minority shareholders' interest.

Credit ratings cut by S&P's: This has happened so often in the last 6 months that we are now almost numb to it. Standard & Poor's Corp cut Malaysia's credit ratings, due to concerns that the downturn in economic growth will cause banks' bad loans to rise, increasing their need for more capital. S&P lowered Malaysia's foreign currency ratings to "A-" from "A". It also downgraded the country's long-term local currency ratings to "AA-" from "AA". We suspect the ratings cut was in partly in response to the MAS restructuring deal. S&P said that "Precedents of government support for the financial system, and close ties between the political and business elites, indicate that the public sector may shoulder a sizable portion of the burden (of Malaysia's weakening medium-term growth prospects)."

Market outlook: Any technical rebound in the KL Composite Index is likely to be muted by concerns over the RHB-Sime Bank deal. RHB, RHB Capital and RHB Sakura Merchant Bankers have been given to April 24 to announce details of its funding scheme for buying Sime Bank.

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