Looming debt restructuring


AS one of many largest company debt restructuring workout routines lately is about to start, it begs the query of whether or not some native firms have taken on an excessive amount of debt previous to the pandemic.

The case of Sapura Power Bhd, saddled with unpaid money owed and payables to the tune of RM15bil, has been extensively reported.

Whereas Sapura Power has a laid out plan on the way it intends to go about fixing this drawback, discussions with its nervous lenders and collectors is a unique matter.

Sapura Power might search the help of the nation’s Credit score Debt Restructuring Committee (CDRC), like how some, albeit smaller oil and gasoline listed outfits in Malaysia, handled their crumbling debt that they discovered troublesome to service, particularly after the 2014 oil crash.

CDRC first reared its head following the 1997 Asian Monetary Disaster when many massive Malaysian firms had been hit by a devalued ringgit, placing them within the not possible scenario of getting to service their debt, a lot of which was denominated in United States {dollars}.

Quick ahead to at present, and you’ve got a scenario the place low-cost debt has been obtainable since 2009.

CDRC was arrange by the federal government to supply firms and their collectors a platform to work out possible, speedier and fewer cumbersome debt resolutions with out having to resort to authorized proceedings.

The CDRC was first arrange following the 1997/1998 monetary disaster and ceased operations in 2002, solely to be revived in 2009 as a way to assist financially ailing firms.

Quick ahead to at present and the query is, are some Malaysian listed firms overgeared?

One fascinating information level is that this – the debt-to-earnings earlier than curiosity, taxes, depreciation, and amortisation (Ebitda) ratio of prime Malaysian public listed firms has octupled since 2009, going by information from Bloomberg (see chart).

One other is that this: the debt ranges of Malaysian firms (excluding monetary establishments) has grown by greater than 30% since 2009.

Based on the Financial institution of Worldwide Settlements, the debt degree of Malaysia’s non-financial company sector had grown to 150% of the nation’s gross home product (GDP) in 2021.

That is larger than regional international locations similar to Indonesia, whose company debt stands at 42.4% to GDP, whereas India’s is at 87.7%.

The worldwide debt charge stands at 98%, notes the Worldwide Financial Fund. Making issues worse is the truth that earnings of Malaysian listed firms have additionally been on a downtrend since 2012.

Earnings per share (EPS) of FBM KLCI firms stood at 111.8 sen in 2012, dropping to 71.13 sen in 2020 and stood at 104.72 sen on the finish of final 12 months.

Supporting this, is the assertion lately made by Bursa Malaysia chairman Tan Sri Abdul Wahid Omar throughout the launch of the PLC Transformation Programme.

In a report, Wahid stated listed firms have posted a decline in profitability between 2016 and 2019, the place the earnings of the FBM KLCI element shares fell by 4.3% whereas the earnings for the FBM Emas element shares, the a lot broader index with many extra shares, dropped by 1.2% over the four-year interval.

This was the interval earlier than the Covid-19 pandemic hit the worldwide financial system.

And primarily based on the MSCI Nation Index between 2020 and 2022, the market’s forecast earnings per share and compound annual progress charge had been among the many lowest within the area at 2.5% in contrast with Indonesia and Thailand, which had been at 22.5% and 10.3% respectively.

The Rankings Company of Malaysia (RAM) additionally revealed some fascinating numbers.

In an evaluation of the efficiency of 725 non-financial listed firms in Malaysia, RAM famous that after a promising export-driven restoration within the first half of 2021, progress retreated to minus 4.5% within the third quarter of 2021.

“The reimposition of the nationwide MCO from June to its gradual easing in mid-July dampened the financial system and concurrently noticed third quarter 2021 company earnings take a beating,” the report stated.

However what about their debt servicing talents? On this concern, the RAM report opined that every one appears nicely for now.

“Over half (55.2%) of the 725 firms in our pattern recorded decrease Ebitda year-on-year, whereas one in 5 recorded working losses. Regardless of the weaker earnings, leverage metrics as measured by each Ebitda to debt and debt to fairness ratios reveal still-robust steadiness sheets and debt servicing aptitude.

“Corporations’ liquidity positions have additionally remained satisfactory to cushion in opposition to rising uncertainties.

“Bursa corporations have ample reserves to maintain 4 months of working bills, with most of those reserves being in liquid money and money equivalents.”

A cry for assist

A number of firms have already sought assist with their debt, particularly those who loaded on extra debt previous to the onslaught of the Covid-19 pandemic.

For instance, at the least 4 different listed firms had lately gone to the CDRC to kind out their debt points final 12 months.

These embody property and hospitality firm Sentoria Group Bhd, and oil and gasoline service corporations Nam Cheong, Daya Supplies Bhd and Alam Maritim Assets Bhd.

These are smaller corporations although. This 12 months, it appears like bigger corporations are in search of debt restructurings.

Just lately, AirAsia X Bhd went by a whooping RM33bil debt restructuring, which noticed its collectors write off 99.5% of their funding.

In different phrases, the airways pays simply 0.5% of the debt owed.

Omni Capital Companions founding companion Scott Lim expects extra pressing debt restructuring on the horizon if firms can not recuperate quick sufficient from the Covid-19 pandemic, and to generate sufficient money movement to cowl their money owed.

“It’s regular for firms to borrow to develop their companies.

“However, in Malaysia we have now many firms which are within the ‘conventional sectors’ that require excessive capital expenditure similar to property growth, O&G, plantations and utilities.

“The earnings progress of those ‘conventional industries’ has been tepid over the previous six to seven years as they’re additionally competing with new sectors similar to expertise,” he tells StarBizWeek.

He factors out that the native inventory market predominant index, the FBM KLCI, has not been rising over the past seven to 10 years because of the unexciting company earnings.

“The Malaysian inventory market is likely one of the worst performing markets within the area since 2009.

“There are structural points that have to be addressed similar to whether or not firms’ digitalisation adoption is transferring quick sufficient.

FBMKLCI30 EPSFBMKLCI30 EPS

Areca Capital Sdn Bhd CEO Danny Wong suggested firms that have to restructure their debt to do it as quickly as potential, particularly with central banks all over the world growing their rates of interest.

“Each time there’s a disaster, debt ranges will enhance or spike as a result of firms’ income shall be disrupted, except these firms have sizable money reserves.

“We do count on extra firms to undergo restructuring to assist restore their steadiness sheet, which is essential to proceed their enterprise and facilitate additional progress,” he says.

Final week, the Federal Reserve (Fed) introduced its first interest-rate hike of 25 foundation factors to 0.5%, and signalled there can be extra hikes this 12 months.

Again in Malaysia, economists count on Financial institution Negara to take a extra conservative stance.

Expectations are for at the least one charge hike of 25 foundation factors this 12 months.

When firms take borrowings to develop their enterprise, earnings progress needs to be greater than the debt, however that has not been the case in some listed firms for the previous 5 to seven years.

Based on information by Bloomberg, the 30 firms that make up the parts of the FBM KLCI had skilled a flattish earnings per share (EPS) progress from 2010 to 2017.

EPS for these firms have been on a decline since then.

Whereas, the net-debt per share of those firms have been rising at a 24% compounded annual progress charge from 2009-2019, the Bloomberg information exhibits.

For example, Tenaga Nasional Bhd’s whole debt has greater than tripled to RM80.9bil in 2021 from RM22.62bil in 2009.

Wong reckons that even earlier than the Covid-19 pandemic, there had already been a development of some firms borrowing cash to help their money flows.

“Our company EPS has been on a decline since 2014, after the Fed’s tapering quantitative easing measures as a result of many firms didn’t change their enterprise mannequin and are elevating debt to help their present enterprise.

“As well as, our Industrial 4.0 adoptions aren’t transferring quick sufficient.

“We’ve to cut back our dependence on overseas labour and undertake new sectors to help progress transferring ahead,” he says.

An oily concern

The sector that’s the most affected by debt issues is oil and gasoline (O&G). Ever for the reason that 2014 oil crash, many gamers within the sector had been badly hit, particularly those who had taken on a lot debt.

Bursa-listed oil and gasoline service tools firms similar to Daya Supplies Bhd, Barakah Offshore Bhd, Perisai Petroleum Teknologi Bhd, Velesto Power Bhd (beforehand recognized UMW Oil And Gasoline Corp Bhd), Icon Offshore Bhd, Alam Maritim Assets Bhd and TH Heavy Engineering Bhd, all had overgeared throughout the growth days of excessive oil costs, which was simply previous to the September 2014 oil worth crash.

A few of these firms had earlier ended up with the CDRC.

One instance is Perisai Petroleum, which was a darling inventory on Bursa Malaysia previous to the 2014 O&G crash. The corporate needed to be liquidated after its regularisation plan didn’t pan out.

Now, all eyes are on how Sapura Power goes to get out of its debt doldrums. It’s price noting that the corporate had gone by varied company workout routines since 2014. These ranged from asset disposals, capital injections and debt refinancing. It additionally had undertaken large asset impairments on its books.

The train that caught the market’s consideration was the large RM4bil money name in 2019 that noticed the emergence of Permodalan Nasional Bhd turning into Sapura Power’s single largest shareholder with a 40% stake.

Nevertheless, regardless of that large capital injection, Sapura Power continued to be within the crimson. The truth is it needed to tackle a RM10.3bil debt refinancing final 12 months. Final week it posted its largest quarterly lack of RM6.61bil for its fourth quarter ended Jan 31, 2022. Its full 12 months web loss was RM8.9bil. It had made a RM3.3bil provision for impairment on goodwill, primarily on its drilling belongings.

Whereas Sapura Power has for a while had an enormous order ebook operating into billions of ringgit, analysts level out that the group struggles on account of its excessive operational prices and losses from legacy contracts and low margins initiatives.

“Sapura Power blamed its state of affairs on ‘legacy contracts’ that didn’t consider Covid-19- associated compliance prices, however that’s not prone to be the one concern, in our view.

“The corporate’s misfortunes are most likely on account of over-optimistic price estimates, aggressive bid costs in previous efforts to win contracts and potential administration competency points,” CGS-CIMB Analysis stated in a latest report.

Two weeks in the past, Sapura Power proposed a restructuring of its RM15bil of debt that might contain banks, distributors and contractors. The corporate has been dealing with a number of winding-up petitions by a few of its distributors over unpaid monies.

Nevertheless, Sapura Power managed to safe a restraining order – efficient for 3 months from March 10 – to restrain and droop authorized proceedings in opposition to it, whereas enabling the group and its subsidiaries to interact with its collectors with out being disrupted by the specter of litigation. It was additionally given a court docket order to summon conferences with its collectors to think about a proposed scheme of association as a part of its debt restructuring plan.

Sapura Power’s proposed debt restructuring plan has additionally been filed with the inventory alternate. The 44-page doc entails that for each RM1 debt owned, 25 sen shall be refinanced, 20 sen shall be transformed into perpetual non-tradeable notes which have a 5% coupon each year. This perpetual paper is convertible into strange shares of Sapura Power from its fourth 12 months.

The remaining 55 sen shall be transformed to perpetual non-tradable zero-coupon notes issued by Sapura Power. These notes shall be transformed into shares in Sapura Power’s subsidiaries, particularly Sapura Drilling Sdn Bhd, Sapura Know-how Options Sdn Bhd and Sapura Geosciences Sdn Bhd, within the fourth 12 months.

It’s left to be seen if collectors will settle for the proposal, contemplating it entails a big haircut. Moreover, a debt restructuring professional reckons that to ensure that firms like Sapura Power to maintain their money flows and operations, a white knight is probably going wanted to come back in with recent capital.

One of many lenders concerned is the nation’s largest financial institution by belongings, Malayan Banking Bhd, a 49%-unit of PNB.

A banking analyst expects that the RM10bil debt of Sapura Power is unlikely to have a big affect on the banking sector.

“It isn’t a single financial institution publicity and the banks might have already supplied for this over time. The affect is not going to be vital to the banking sector,” the analyst says, including that, “It needs to be famous that Sapura Enegy’s money owed are backed by belongings.”

Sapura Power’s belongings embody its remaining 50% stake in exploration and manufacturing arm SapuraOMV.

In 2018, the corporate bought 50% of SapuraOMV to Austria’s OMV Aktiengesellschaft for US$890mil (RM3.7bil).

Sapura Power additionally has different sizeable belongings together with its fabrication yard in Lumut, six semi-tender drilling rigs and 6 tender help rigs, in addition to some vessels.

Sapura Power began an asset monetisation plan final 12 months and is in talks with potential patrons.

The issues with confused money flows and the lack to service debt is actually not restricted to the oil and gasoline sector.

Business observers reckon that extra such restructurings shall be going down now even with small and medium sized firms, as debt reprieves come to an finish.

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