Renong chairman Halim Saad's proposal to swap the company's 12.3% stake in Commerce Asset-Holding (CAH) to redeem some of the M$8.4 billion zero-coupon bonds issued by its Projek Leburhraya Utara-Selatan (PLUS) toll-road unit is not a bad plan. CAH, which controls Bumiputra-Commerce Bank, Malaysia's second biggest banking group, is in good shape fundamentally but there exists a lack of demand for its shares.
More precisely, there is a lack of domestic demand and foreign ownership is already approaching the 30% ceiling allowed by the Malaysian government. In addition, New Straits Times Press is looking to offload its 13.0% interest in CAH. Hopes a strategic investor could be found for both the Renong and NTSP stakes in CAH suffered a setback when Malaysian Resources Corporation ruled itself out as a bidder.
Renong had originally hoped to sell its shares and warrants in CAH for at least M$1.6 billion ($421 million) and use these proceeds to redeem PLUS bonds. However, given the lack of buying interest and the amount of CAH stock on offer, Renong is hoping the holders of the PLUS bonds, which yield 9.4% a year, will look upon the share-swap as an opportunity to realise profits early.
If they hang on to the bonds, issued last year as part of Renong's debt restructuring, holders are due to be paid in 2006. If they accept CAH shares, they could see their money a lot sooner than that, even after taking into account a likely moratorium and floor price.
In order for the share-swap to be able to proceed, Renong will require Bank Negara Malaysia approval, though this is unlikely to pose much of a problem given the company's close links to ruling party UMNO United Malays National Organization (UMNO).
Needs 75% bondholder support
It really comes down to whether or not the PLUS bondholders are going to accept the plan. In order for it to be accepted, with allocations made on a pro rata basis, a bondholders' resolution with 75% support is required. So far, Renong hasn't given details of what exactly it plans to offer, but it will likely have to be pretty generous in order to convince the bondholders to take on equity risk.
The bondholders in the main are Malaysian banks and insurance companies, as well as the Employee Provident Fund (EPF). EPF has in the past shown it will do what the government wants - most likely back the Renong board - but for the others, accepting the share swap proposal could have implications for their capital structures. Also a consideration, the take-up among foreign bondholders may be limited by CAH's foreign ownership restrictions.
To date, Renong has already redeemed M$1.1 billion of PLUS bonds. The company also recently agreed to sell stakes in 46.8%-owned Time Engineering and Time dotCom to Singapore Telecommunications for more than M$2 billion. Renong has said it plans to list 30% stakes in Prolink Development and PLUS by the end of this year.