Wednesday, February 18, 2009

Selangor Water Concession Buy-Back Offer: A Response

I received the following response below from HYS, who believes that our approach to the take over of water assets and concessions in Selangor victimises bondholders and shareholders. I will not respond in detail, as I believe the answer is already in the statement made earlier on the basis of our acquisition.

My short reply is, shareholders and bondholders enter into agreements eyes wide open. Should a concessionaire decides to so over-leverage itself, raising more money than it ever needed to operate the business relative to its actual equity investment, should the Government (i.e., Malaysian tax-payers) be made to bear the brunt of the bailout?

The politely written letter is as follows:
According to respective company's announcement, the Selangor Government offer to acquire their respective water business without taking over the debt.

Personally, I find it not fair to the shareholders of the company and the lenders.

The initial investment in the business was financed by equity holder through the company's share and lenders via debt. The purchase consideration offered by the State Government is below the sum of company's market capitalisation and net debt. Eventhough the management of the company would love to support the State Government's Proposal, they still need to take care the stake holders' wealth.

If the companies are being forced to sell the assets to the State Government, the implication to the malaysia stock market's sentiment is unpredictable. The lenders may end up holding huge NPL.

Hope I make my point clear.
Just to comment a little further, it's a little like the bailout of Malaysian Airlines (MAS), which got into deep financial trouble in the early 2000s due purely to excesses and weak management, and was unable to pay back its bondholders - should the Government have step in as it did and pay double the value of MAS, at the expense of the tax-payers?

So what do you think?


Anonymous said...

In the first place, what the hell was the shareholder doing financing its equity stake with debt that is secured by the equity itself?

Its generally a bad idea to finance equity investment in debt(Corporate Financelesson 101: there is a reason why its called equity..) and then the stupid banker and govt allowing the financing to be secured by equity itself?


The banker and the govt which allowed this structure to happen in the first place should be shot especially given that the govt has the option of taking back the concession with a fix formula all spelled out. Second corporate finance lesson 101 - always get a good lawyer who crosses his T's and i's.

Bottom line is stupid investors and even more stupid lenders deserve to be screwed royally....

Anonymous said...

I definitely agree with you Tony, all these cronies of "be end" politicians privatized our nation utility provider by connection and simply managed it so that it remains in debt, if making money they take it, if lost money they pass it back to "be end" government. After all, somebody will have to settle it, else the people suffers. In both ways the people also lose!

Anonymous said...

1. companies enter into agreements and deals based on advantages accruable to the company be it win-win or win-lose,
2. shareholders invest in a company based on the potential incomes the company promises or shows proof they can deliver,
3. banks and financial institutions loan $$ to the company after a thorough due diligence of its potential earnings, either after reviewing its agreements on hand and evaluating the risk of such promised earnings stream in the future; same applies for investment bankers who do the float of the bond issue for the company - they do a thorough investigation of the earnings potential of the company

now i am not sure if these water concession agreements are protected by the OSA, which means the shareholders have no sight of this, and the concession companies are marketing a "prized" catch shrouded in secrecy. and if the bankers/bondholders take up the loan without sight of such agreement, then they are also stupid and should fire those in charge of doing the dd/audit.

bottomline the company is sold to investors/bondholders based on a
secret document, and if they are so gullible, then woe be to them.
this is a purely private sector transaction. any attempt to draw the government into the fray equals a bailout.

Anonymous said...

Dear Tony, looking beyond this water concession buyback, there is this billion-dollar project to tap water from Pahang and channelling it to Selangor.
A Martian looking at us would have laughed its head off. We spent millions{billions?]taking flood water out from KL/S'gor and now we are about to commit billions to tap water from Pahang.
Why can't we just harvest the rainwater[read floodwater], treat them and store them for industrial consumption, if not for domestic purposes?The technology for this is readily available. It's not rocket science.