Challenging time for ailing PLCs
Cheah Chor Sooi 
CDRC is currently handling debt-restructuring of two O&G companies, namely Perisai Petroleum Teknologi and Alam Maritim

With bullish expectations for the equity market turning into a cautious mood following the recent Wall Street sell-off, concerns have been raised on the fate of financially-troubled companies.

The time is perhaps ripe for debt-saddled companies or those with poor cash flow to re-assess their debt obligations. Better be safe than sorry.

Moreover, these companies should not discount the possibility of share-dumping by investors to reduce further losses.

After all, stocks of debt-ridden companies are often the first to come under pressure every time market volatility occurs. Nevertheless, it has to be pointed out that the concerns raised are not tantamount to pressing the panic button given the health of the global equity markets has somehow been restored after the trauma of recent sell-off.


Sense of optimism

From a broader fundamental perspective, conditions this year are also likely to improve owing to better economic conditions and stabilising foreign exchange, according to Malaysian Industrial Development Finance Bhd chief credit officer BN Parthasarathy.

“The country’s GDP is expected to show growth of 5.5% with inflation to moderate to 2.6% [after seeing inflation numbers averaging at 4% in the first nine months of 2017 due to the increase in pump prices],” he tells FocusM. “These will alleviate the debt obligation issues.”

Operating environment to be challenging for companies whose products can be easily imitated, says Parthasarathy

Moreover, after depreciating to the RM4.50 level against the US dollar in the earlier part of last year, the ringgit has strengthened to below RM3.90 prior to the recent Wall Street sell-off.

“We do expect [the] ringgit to remain strong for 2018 which will help companies dependent on the import of raw materials to see improvement in costs,” says Parthasarathy.

Despite the favourable expectations of domestic macro-economic numbers, Parthasarathy cautions that companies still face challenges from geopolitical risks.

His list includes concerns over the North Korean issue, movement of oil prices and reaction to US’ next course of action such as the much-anticipated interest rate hike and its US first policy which would not only affect movement of stock prices, but also export demands of companies.

Elsewhere, he deems the operating environment to be challenging for companies whose products are:

Simple enough and can be produced at cheaper cost and sold at cheaper price points – the more generic the products, the lower the barrier to entry, and hence the thinner their margins.

Not keeping up with technology (more efficient manufacturing process or complex products are not easy to be copied, ie companies in the rubber gloves sector stand proud with high-tech machinery and efficient manufacturing lines).


Restructuring options

In the context of Bursa-listed companies, the common types of restructuring includes deferment which allows the postponement of payment due date and a long time arrangement involving the restructuring of the payment (either past due or not yet due).

“The latter entails consolidation of the outstanding principal and the entire or part of arrears of the principal and profit/interest into a new financing to be repaid over an agreed tenure based on a new amortisation schedule in order to provide for lower periodic payments of financing,” says Parthasarathy.

He also points out three forms of restructuring exercises that debt-ridden companies can consider though “entangled in complication”:

Corporate restructuring: This can be done by way of merger or acquisition by another party that could provide the technical, operational and financial support essential for the company to realise its full potential in the long run. Generally, this option is a lengthy procedure and therefore, it is important that the danger signs are recognised early in order to allow enough time for this option to be adopted successfully.

Compromise or arrangement: The company or any member or creditor of the company could seek restraining order from the court to prevent the creditors from pursuing further legal action. Once sanctioned by the court, the scheme of compromise or arrangement will be binding on all creditors, the company or the liquidators and contributories (if the company is being wound up).

Restructuring (instruments): Apart from settlement of outstanding facility terming-out, a series of alternative hybrid instruments could be proposed to/by a financially-strapped company to settle its facility. These include various types of sukuk/stocks/bonds or equity including irredeemable convertible unsecured loan stocks, redeemable secured loan stocks, redeemable convertible secured notes and guaranteed bonds or other Islamic instruments.

“The immediate challenges [in undertaking the various forms of restructuring exercise] include proposing a viable scheme that includes sources of cash flows both to satisfy existing creditors as well to sustain future business,” suggests Parthasarathy.

Additionally, there is a need to obtain the buy-in of shareholders, different lenders and creditors on a holistic solution – eg cash calls such as rights issue or private placement of new shares would result in the dilution of shareholders stakes in the company if they were not participating in the fund-raising exercise.

Other notable challenges are resolution of potential/on-going legal suits and protracted process which might lead to further deterioration of the company’s value, adds Parthasarathy.

Mediation role in corporate debt-restructuring

ONE government agency entrusted to resolve corporate debt woes is the Corporate Debt Restructuring Committee (CDRC). It was set up during the 1998 financial crisis and have resolved 57 cases with a total debt of around RM45.8 bil

Re-established in 2009 by Bank Negara Malaysia, CDRC is actively involved in assisting viable corporates with multiple financial institutions to work out feasible and market-driven debt resolutions (restructuring plan) through mediation.

In the context of listed companies, CDRC is currently handling two oil & gas (O&G) companies, namely Perisai Petroleum Resources Bhd and Alam Maritim Resources Bhd. It is learnt that their on-going discussions on debt-restructuring with the lenders are progressing well.

Elsewhere, the CDRC is also actively engaged with the Malaysian Petroleum Resources Corp Bhd to provide assistance to O&G companies affected by the global slowdown in the O&G industry.

In February last year, the CDRC disengaged itself in the mediation on both Perwaja Holdings Bhd and Kinsteel Bhd as both companies had failed to come up with an acceptable debt-restructuring scheme despite numerous extensions granted by both the CDRC and the lenders.

One of the key challenges in mediating restructuring cases is finding the right balance in meeting the conflicting needs of both the borrowers and lenders (in a multi-banked situation).

“This could result in a delay by some lenders in approving the proposed debt-restructuring scheme,” says a market observer. “Also, the threat of legal action by other creditors [eg essential creditors such as utility providers] when CDRC only deals with the financial creditors.”

This article first appeared in Focus Malaysia Issue 272.