The Asian Wall Street Journal 16th March 2001

By CRIS PRYSTAY Staff Reporter

KUALA LUMPUR -- Two state-run pension funds and Malaysia's national debt-restructuring agency have acquired a combined 17.2% equity stake in Time dotCom Bhd., after the company's 1.89 billion ringgit ($497.4 million) initial public offering failed to attract private investors.

The government entities' intervention to prop up the IPO effectively shifts part of the cost of rescuing Time dotCom's debt-laden ultimate holding company -- politically connected Renong Bhd. -- from the underwriters of the disastrous IPO to the Malaysian public. The two pension funds have incurred, on paper, a combined loss of about 400 million ringgit in Time dotCom's first four days of trading on the Kuala Lumpur Stock Exchange.

Time dotCom's IPO was 75% undersubscribed and the company's stock plunged 26% on its first day of trading Monday. On Thursday, Time dotCom stock closed at 2.17 ringgit, 34% below its 3.30 ringgit IPO price.

In a statement to the exchange Wednesday night, Kumpulan Wang Amanah Pencen, or KWAP, a civil servants' pension fund, said it had acted as a subunderwriter to acquire 273.9 million Time dotCom shares, or 10.8% of the company's equity at the IPO price of 3.30 ringgit a share.

Because of Time dotCom's plummeting share price, KWAP's 904 million ringgit investment was valued at just 594 million ringgit at the close of trading Thursday -- a paper loss of about 310 million ringgit.

On Thursday, the government's Employees Provident Fund -- to which all salaried Malaysians contribute -- disclosed that it had acquired 81.6 million Time dotCom shares, or a 3.22% stake in the company, through a direct purchase of stock and conversion of debt to Time dotCom shares at the IPO price. At the close of trading Thursday, the EPF's 269.3 million ringgit investment was valued at 177.1 million ringgit, representing a 92 million ringgit loss on paper.

Separately, Malaysia's state-run debt-restructuring agency Pengurusan Danaharta Nasional Bhd. said it also acted as a sub-underwriter for the IPO, acquiring 80 million shares in Time dotCom, or 3.16% of the company's equity. Danaharta said it didn't pay cash for the stake.

Instead the agency said it converted mainly unsecured debts owed to it by Time dotCom's immediate parent company, Time Engineering Bhd., into shares in Time dotCom valued at 3.30 ringgit each.

Many securities analysts and opposition politicians immediately criticized the transactions. In particular, they complained that the use of state-run pension funds to support Time dotCom's widely criticized IPO will further tarnish Malaysia's reputation as a market where the government is prone to bail out politically well-connected companies. Time Engineering, Time dotCom's parent, is 46% owned by conglomerate Renong, the former business arm of Prime Minister Mahathir Mohamad's United Malays National Organization, or UMNO. Renong's controlling shareholder is businessman Halim Saad, who once managed UMNO's companies for UMNO treasurer and Finance Minister Daim Zainuddin.

"It is clearly a gross mismanagement of public funds to invest some 6% of (KWAP's funds) on a counter which all market analysts had declared would nose dive after its public debut," said Lim Kit Siang, chairman of the opposition Democratic Action Party. "There also needs to be a full explanation as to the involvement of the EPF -- this highlights the whole question of need for full accountability of how the EPF is managed." According to Mr. Lim, KWAP had total assets of 15.13 billion ringgit as of June 30, 2000.

State support for Time dotCom follows a string of perceived government bailouts that have left investors here increasingly cynical and wary. In December, the government announced it would buy back the assets of two unprofitable light rail projects -- one owned by a company in the Renong stable. It also purchased a 29% stake in ailing Malaysian Airlines from businessman Tajudin Ramli, another former business protege of Tun Daim.

Time dotCom's public offering was a key part of a debt workout by Time Engineering, which owed about 4.5 billion ringgit to Malaysian creditors before the IPO. Some analysts contend the government had little choice but to ensure its success. "There's a lot of determination at official levels to see the whole restructuring through, whatever the cost. It's too important to the banking system to let fail," says T.S. Pong, head of research at Jupiter Securities.

While Time dotCom's listing is a boon to Time Engineering creditors, analysts criticized the deal as a substitute for meaningful restructuring at the Renong group. "The management is still the same bunch who got in trouble in the first place. Bringing in a bunch of quasi-government shareholders and the same management is not really restructuring," said a bank analyst at a European brokerage firm.

Many Malaysians are likely to react negatively to the news that their pension funds have incurred huge paper losses on Time dotCom investments. The DAP's Mr. Lim condemned the use of pension funds to mop up the IPO's shortfall a "misapplication of public funds."

"With Danaharta, at least there's some excuse," Jupiter's Mr. Pong said. "It's in charge of rehabilitating bad loans and if these guys can't pay cash, at least they get some shares of marketable value. But the pension fund has less of a case, especially at 3.30 (ringgit)."

An executive at Danaharta, an agency set up after Asia's 1997 financial crisis to manage the banking sector's bad loans, said Thursday its Time dotCom share purchase is part of a debt-for-equity swap that will allow Danaharta to recover 70% of the loans owed to it by Time Engineering.

How Danaharta will dispose of the shares -- and recover cash -- isn't clear, analysts say. Should the agency sell Time dotCom aggressively it could further depress the stock price. Alternatively, Danaharta could unload its holdings through a private sale to some investment fund. If the agency holds the shares until its own debts come due, a larger problem could loom. "Danaharta is one of the banking system's biggest borrowers, because of the bonds it issued to buy bad debts throughout 1998 to 2000," said one banking analyst. "We may have a credit problem waiting to explode when those bonds start coming due in 2003."

Malaysian bankers said the sub-underwriting process removed the risk of losses the underwriting banks would have incurred if Time dotCom shares fell below the IPO price. Malaysian accounting standards require that financial institutions, including banks, value their equity holdings at current market prices, which means they must disclose any paper losses on such holdings in their quarterly financial statements. An analyst familiar with the IPO said the share offering was 95% sub-underwritten, which means the banks will be left with just 5% of the shares.

Commerce International Merchant Bankers Bhd. -- a unit of Malaysia's second-largest banking group, state-controlled Bumiputra Commerce Bhd. -- and Perwira Affin Merchant Bank Bhd., another state-controlled bank, were the chief underwriters for the issue.