Highlight Malakoff to refinance debts after IPO lapses

Highlight Malakoff to refinance debts after IPO lapses
Business & Markets 2013
Written by Ben Shane Lim of theedgemalaysia.com
Tuesday, 24 September 2013 16:13

THE listing of Malakoff Corp Bhd is now officially off the table. Instead of postponing its planned initial public offering (IPO), which had already been given the nod by Securities Commission Malaysia (SC), the power producer let the approval lapse earlier this month.

Malakoff is now turning to the bond market to refinance its debts, rather than tap fresh capital with an IPO that had been deferred due to unscheduled downtime at its Tanjung Bin power plant in Johor.

“The refinancing is expected after its IPO failed to materialise. This, however, is not a long-term solution. Malakoff still needs an IPO to give it some breathing room with its cash flow,” says an analyst.

According to industry sources, the power producer is in the midst of arranging to refinance bonds issued by its wholly-owned unit, Malakoff Power Sdn Bhd (MPower). Malakoff is 51%-owned by MMC Corp Bhd, which is controlled by tycoon Tan Sri Syed Mokhtar Albukhary.

Last year, MPower issued RM5.6 billion in a murabahah securities facility as well as an unrated RM1.8 billion junior sukuk, being part of a scheme that had included an IPO by Malakoff to restructure the group’s borrowings of over RM15 billion.

According to sources, the exact structure of the latest refinancing exercise is not known. However, MPower’s junior sukuk is likely to be of immediate concern because of its rather high coupon of 6.5%, which is very expensive to maintain, explains an industry expert, noting that the junior sukuk was supposed to have been refinanced by the Malakoff IPO.

Overall, Malakoff as a group has roughly RM14.75 billion in long-term borrowings and another RM1.3 billion in short-term debt, as at Sept 30, 2012, based on a report by Maybank Investment Bank released in March. This translates into a gearing of 3.95 times.

Malaysian Rating Corp Bhd (MARC) has an AA-IS rating on MPower’s bonds but declined to comment due to the ongoing refinancing exercise.

“How this pans out for Malakoff will depend on how they structure the new bonds issue. One thing they plan to do is to spread out the maturities of the bonds, which should help with their cash flow. Right now, the repayments are a little too lumpy,” says the industry expert.

But while the refinancing exercise will spread out the maturities of the bonds, it may translate into higher financing cost for the company. First of all, Malakoff will have to make an offer to existing bondholders to buy back the bonds. To entice bondholders, Malakoff is expected to offer a mark-up of -20 to -30 basis points on the current mark-to-market yield. (Lower yields mean higher bond prices.)

According to industry experts, Malakoff has already begun engagement with bondholders on the buyback, while Maybank IB is the lead arranger for the refinancing exercise.

Secondly, the timing of the refinancing is not the most ideal. Bond yields have been on the rise in the past few months, on concern that the US Federal Reserve will taper off its US$85 billion monthly bond-buying programme. In the past one year, yields for Malaysian government securities have risen from 3.12% and 3.5% for 3-year and 10-year bonds to 3.4% and 3.81% respectively.

While the cost would have been cheaper for Malakoff had it refinanced its borrowings earlier, it’s still better to refinance now than later, say analysts.

“Bond yields are now on an uptrend, given the volatility in the market. With this outlook, it would be potentially cheaper to issue debt now [rather than later],” says Chia Suil Fun, assistant vice-president of fixed income research at Maybank IB.

Thirdly, the problems at Tanjung Bin, which had disrupted Malakoff’s IPO plan, could weigh on its refinancing cost. The group has missed an estimated RM200 million or more in terms of capacity payments from TENAGA NASIONAL BHD [] after its 2,100mw coal-fired plant in Tanjung Bin failed to maintain the required available capacity.

On top of that, the damaged equipment, which caused the prolonged unscheduled outage, will also be costly to replace. Malakoff is still in discussions with Tenaga to recover some of the capacity payments.

That said, Malakoff’s status as a large power producer with total generation capacity of 6,019mw enables it to command a good rating in the debt market. The main problem is that the group’s gearing is very high, say analysts, noting that its interest expense is around RM1 billion a year.

While the refinancing will relieve its cash flow pressure in the near term, the costlier new bonds issue will exert more pressure on Malakoff’s debt service coverage ratio, and this means the group will still have to go for an IPO to strengthen its long-term capital structure.


This story first appeared in The Edge Malaysia Weekly Edition, on September 16 - September 22, 2013.