Greenshoe remembers interviewing Daim Zainuddin in the spring of 1998. At this stage the all-powerful Malaysian finance minister was orchestrating events from behind the scenes as head of the National Economic Action Council.
In his bare office, wearing a simple shirt and leaning on his desk, it was hard to believe you were talking to the man who is Malaysia Inc.
However, his cool and measured responses broke down when Greenshoe asked him whether Kuala Lumpur’s monorail project was doomed to fail: “You are here to criticize everything. There’s nothing right in this country.”
Last month Daim announced that the government would bail out the monorail project. It will cost M$5 billion ($1.31 billion).
The project’s debt will be assumed by the government – which will take ownership of the monorail – and the lenders will be given five to 15 year government bonds.
The creditors committee includes banks, but also – and this is a key point – the Employees Provident Fund (EPF). How often can you remember seeing a national pension fund on a restructuring committee?
However, this is Malaysia. Throughout the crisis the EPF has been used to support projects deemed to be in the national interest. For a pension fund it has a remarkable penchant for risk.
All of this brings us to the nub of the monorail bailout. Obviously EPF can’t suffer too much. But that’s just the start of the matter.
The bigger issue is Renong, the troubled company which has long been associated with UMNO, the ruling party. Renong has M$20 billion of debt – and happens to own Putra, one of the two monorail companies being bailed out. This bailout will remove a sizeable chunk of its debt.
Why is this important? Well, because a key piece of financial engineering is in the works. An announcement the week before hints at what’s going on.
Renong’s key shareholder Halim Saad announced that he might take Renong private. This will cost him about M$5 billion.
But Halim has no ready cash. To take Renong private he is going to have to borrow from the Malaysian banks, which already have a big exposure to it and Halim. Only just emerging from an awful banking crisis, a fresh bout of lending to Renong would be a positively Japanese course of action.
But Renong is no ordinary company. Halim has even testified that he is a proxy shareholder for UMNO (which means Mahathir, Daim and the rest of the chaps).
There is an additional element to this. Halim’s announcement about taking the company private is largely a response to a very dicey issue he is facing. Back in 1997, Renong’s subsidiary UEM bought 32% of Renong for M$2.3 billion. This caused an outcry among foreign minority shareholders who suddenly saw UEM’s pristine balance sheet turned upside down.
The government became very sensitive to some very justified criticisms from international investors. As a result Halim came out and announced that he had sold a personal put option to UEM, which would allow UEM to sell back to him its 32% stake in February 2000.
Ever since he made that announcement there has been rampant speculation as to whether he would be able to honour the put. If he were to fail to honour it, one can imagine a fresh bout of Malaysia bashing from international funds.
So what to do? Well, here’s an idea. Why don’t we swap M$5 billion of toxic monorail debt (most of it pure Renong exposure) for safe government bonds. The result of this is it takes M$5 billion of bad exposures off the Malaysian banks’ books.
Voila, the Malaysian banks can lend Halim the M$5 billion he requires to take Renong private. The banks can rightly argue that their exposure to Renong/Halim is largely unchanged, and meanwhile the rest of their portfolio will continue to improve in line with Malaysia’s own economic recovery.
With Halim cashed-up that means he can honour the put option, as part of the process of going private.
So everyone’s a winner, right?
The bottom line about Renong is that it will eventually – Greenshoe believes – become a good company again. Before the financial crisis it was regarded by fund managers as the closest thing to Malaysia Inc and was a core holding.
As Malaysia emerges from crisis, Renong will continue to be given the pick of Malaysia’s infrastructure projects (its North-South highway being the classic example) and will return to financial health.
So what is going on here? Well, Halim is taking Renong private at the lowest ebb. Greenshoe suspects it will be taken public again three to five years down the track, when the company is back to its pre-1997 state. When that happens, Halim and friends will make a massive windfall gain, by listing the company at a much higher valuation.
Of course, none of this would be possible without a little help from the government, which apart from bailing out the monorail system still has to grant some waivers to allow Halim to take the company private.
