From The Singapore Straits Times, 4th December 2000

By Lim Say Boon

RECENT corporate manoeuvres in Kuala Lumpur are depressing for investors with an interest in this market for a very practical reason.They highlight Malaysia's market dilemma: The country's biggest - and most debt-laden companies - are going to find it difficult to break the debt gridlock without a healthier stock market.

But the Catch-22 situation is that the market is unlikely to break out of its trading range until international investors see major breakthroughs in debt resolution - and on terms which are fair to minority shareholders, and dare we say, taxpayers too.

Malaysians need only look a little to the north for an example of how the market regards the lack of progress in debt resolution.New non-performing loans (NPLs) are creeping back into the Thai banking system faster than it can clear the old ones. And the courts have yet to resolve Thai Petroleum Industry's debt stalemate.

Little wonder then that the Stock Exchange of Thailand Composite Index (currently at 275 points) is now back near the low reached during the regional currency crisis - that was 207 points in September 1998.

But Malaysia's problem is not so much NPLs per se. Indeed, thanks to distressed-assets management agency Danaharta's buying of non-performing loans from the banks, the figure is now down to around 10 per cent on a three-month basis.

The real issue now is how the biggest and highest-profile NPLs are going to be resolved.

From Malaysia's largest construction group United Engineers Malaysia's (UEM) proposal to buy the assets of parent Renong to Prime Minister Datuk Seri Dr Mahathir Mohamad's hint that the government may consider buying out aviation company Naluri's stake in Malaysian Airline System (MAS) at RM8 (S$3.70), to the country's largest cellular-phone company Technology Resources Industries' (TRI) extension of the repayment date for its Eurobonds - these convoluted deals and propositions tell the tale of the difficulties of resolving debt in an environment where salvation of controlling shareholders remains a priority.

They tell the story of a government that takes very seriously its commitment to its model 'sons of the soil' businessmen. The loyalty is admirable, but dangerous for the economy.

Let's start with Renong. The deal announced a couple of weeks ago will allow Renong to unload all its pledged assets to UEM at prices which many in the market reckon are on the high side.

The thing that sticks in the market's throat is the perception that Renong has transferred its problems to UEM. The deal will leave Renong with a clean balance sheet, but dilute UEM's earnings and net asset value.

The purchase price of RM6.7 billion will be satisfied through the issue of 190 million new UEM shares at RM6.30 per share, RM533.8 million in irredeemable convertible unsecured loan stocks and the proposed assumption by UEM of Renong's Plus bonds amounting to RM5 billion.

Granted, the UEM shares will be issued at a 25-per-cent premium to the close of RM5.05. But it is still an unattractive deal for UEM. To begin with, UEM's shares are now at their year low.

Besides, the price of RM6.30 is at a deep discount to UEM's estimated net asset value of RM12.22 per share.

On the other side of the deal, the Renong assets being injected into UEM are largely non-cash generating and their returns are poor. All of which means the deal will dilute UEM's earnings.

The deal increases Renong's stake in UEM from 38 per cent to 49 per cent.

Now, the whole idea might well be that if UEM's share price eventually appreciates, Mr Halim Saad, the boss of Renong and UEM, could then raise his stake in Renong above the compulsory acquisition level, take the company private, and then distribute the UEM shares to allow him to clear his multi-billion-ringgit personal debts.

If that is the game plan, we would have come full circle - Mr Halim needs the market to accord a more generous valuation to UEM.But we have witnessed how the market reacted to the deal - it sold down both Renong and UEM shares. Therein lies Malaysia's debt dilemma.Then there is the example of Mr Tajudin Ramli of MAS, TRI and Naluri fame.

His company TRI has just succeeded in deferring payment on US$535 million (S$910 million) worth of Eurobonds until May 2002. And the deal also allows TRI to avoid paying interest charges. Instead, it will issue new shares in lieu.

But if interest rates stay at this level until mid-2002, TRI would have to fork out as much as RM588 million in interest which, at current prices, means it might have to issue as many as 208 million new shares (equivalent to 27 per cent of its share capital). Now, of course, the higher the share price at the time of issue, the greater the dilution.

All of which leads us back to the issue of how the Malaysian market is going to behave - and its impact on debt restructuring. The lower the share price at the time of the exercise, the more shares TRI will have to issue to bond holders in lieu of interest payments. And the more the market will anticipate the coming dilution and sell down the stock.

Related to this is Dr Mahathir's suggestion that the government might pay around RM8 apiece for shares in MAS held by Mr Tajuddin's Naluri, which is a huge premium to its current price of RM3.80.Of course, the better the price Mr Tajuddin realises from his MAS shares, the better his fighting chances are of surviving his troubles at TRI.

But the problem is the market - especially international capital - views these deals rather negatively. They are not helpful in encouraging international funds back into the market. And that in turn puts corporate manoeuvres such as those in TRI, Renong and elsewhere in an even more precarious position. So there's your Catch-22!

(The writer is a director with OCBC Investment Research. The views expressed in this article, which he contributed to The Straits Times, are his own.)