The Corporate Debt Restructuring Committee (CDRC) has an unenviable task: to restructure Malaysia's entire steel industry and its public transport system. This involves taking over entities owned by the Renong group and the DRB-Hicom group, Malaysia's transport group.
CDRC is also responsible for restructuring the debts of the Renong group, which has M$25 billion ($6.61 billion) in debt, or 5% of Malaysia's banking system loans. The group shocked investors in 1997 when United Engineers Malaysia (UEM) - the strongest of the group companies - bought 32.6% of its parent, Renong Bhd, in what was perceived as a bailout of certain shareholders. The conglomerate, which has assets spread from tollroads to property projects, has been locked in mortal battle with creditors ever since. When CRDC stepped in, its game plan was very simply to degear the group and save its assets.
In the first of a three-part series, CDRC chairman Chellappah Rajandram discusses what it took to fix Renong and Malaysia's other big conglomerates after the 1997-98 financial crisis.
Q: Malaysia has pulled off some pretty big restructurings without haircuts to creditors: the Lion group restructuring, Time Engineering and Renong group restructuring. How was that possible?
A: You can only pull off that kind of restructuring if there is enough cashflows - not just today, but over a period of time. When we do a restructuring exercise, we first say: 'Let's settle the creditors in full.' In some cases, if we find out we can only give creditors 30 cents to the dollar, we tell them that. But we didn't have to do that for the Renong group.
Q: Why not?
A: In this case, we thought we could pay it all off. 'Just give me a little time,' I said. They [the creditors] said, 'No, no, we don't want this instrument.' So I looked at PLUS [the group's strongest tollroad concession]. PLUS has its own borrowings but tremendous income. I wanted to use those cashflows to issue a bond. We took the cash from the toll road level and used it to refinance the whole thing again.
Q: So the first issue was about settling those debts & the holding company debts?
A: The debt level here (Renong) was M$5.4 billion, the debt level here (UEM) was M$2.96 billion or so. The M$25 billion figure is borrowing at every level [for the entire group]. I wanted to settle the [holding company] debts first. We asked PLUS to form a special purpose vehicle [SPV] to issue new papers to pay off those debts. In six years' time, I would need to pay back M$16 billion, but nothing now.
Q: The zero-coupon bond means a big bullet sum of payment for 2006. Wasn't the Renong-UEM group worried about committing to such a big sum?
A: No. It was backed by the strong cashflows of PLUS and charged against all their other assets.
Don t forget we have other assets. Prolink [the group's big property development in Johore] is worth M$4.5 billion today; Commerce Asset [Malaysia's second largest banking group], is M$2 billion dollars; Time Engineering and its subsidiaries that we are restructuring all have values. And we have UEM shares, which are worth M$8 each in the market. That's another M$1 billion in equity holdings here. All these things are mortgaged to the SPV vehicle. So it's doubly securitized.
Q: What's the game plan now?
A: The next part is I am restructuring each and every one of [Renong's] companies, even Putra [Malaysia' s first light-rail system].
Q: Every one? So where does the debt reduction-asset sale strategy fit in?
A: The PLUS listing is a sale of an asset. We are now proposing PLUS is listed. If we sell 30% of the shares, and we are planning to do that by year-end, we will get back about M$4 billion in cash. That's values PLUS at M$15 billion. We reduce this debt of M$8.4 billion by M$4 billion straight away instead of waiting for year 2006.
Q: That's very similar to Time Engineering, which seeks to repay M$4 billion or 80% of its debts by October.
A: Exactly. Now, my debt level is M$4 billion. So the bond issue is immediately reduced. In fact, now we are worried whether the bankers will like that because they are earning 9.4% on these assets. If they are getting back cash today, they won' t be able to earn 9.4%. So bankers could say they would rather hold this paper.
Q: Is this because it is hard to find high-yielding assets to back in today s low interest rate environment?
A: Right. That's exactly what we are talking about.
Q: So tell us a little more about CRDC.
A: I think it's very important to understand CRDC is not the deep-pocket restructuring institution in this country. Banks do their own restructuring of individual loans; you can also do it through the courts. Danaharta [Malaysia's bad loan agency], which takes over non-performing loans in the banking system, is also involved in debt restructuring.
We're a mediating company, with no special powers unlike Danaharta. We accept only companies with M$50 million in debt and more than two creditors. Either the creditors or debtors can apply to CRDC, but all the 71 applications that we have received have come from the debtors. The CRDC assesses their proposal. If the quick viability test says this company can be saved, and can be put back, then we will accept the company's application. Of the 71 applications with M$40 billion, we rejected 23 of them.
Q: What happens after you accept an application?
A: We call for a creditors' meeting to put forward our case. The first thing we request for is a standstill from the banks, so they don't take any further action against the company. During this period, banks usually agree to do this formally or informally.
Q: How about NPL classification during this period?
A: From the central bank's point of view, if they have classified a non-performing loan, then they leave it. If they haven't classified it yet, they are given more time to classify it. It could be six months of a stand-still period, or a bit more depending how complicated the case is.
