Is Edra
Energy’s IPO the best way forward for 1MDB?
by
Wan Ahmad Fayhsal
Previously the writer has argued that the criticality
of saving the strategic assets of 1MDB – land and power plants – is akin to
saving some of the companies that were hugely impacted by the 1997 Asian
financial crisis. Although the actors are different, the systemic risk posed by
1MDB’s debt is not much different the one confronted by Malaysian government
under, then (Tun) Dr. Mahathir’s leadership.
How exactly the government especially Ministry of
Finance (MOFC) could save 1MDB’s assets?
Earlier MOF appointed CIMB Group Holdings Bhd as an
advisor to sell power assets of Edra Energy Bhd, a subsidiary of 1MDB Group but
in an official press statement released by MOF on 1st April, the
appointment was terminated.
Rumors on the involvement of MOF’s in-house
restructuring outfit Prokhas Sdn Bhd to help restructure 1MDB debt was denied
by MOF.
At present as per stated in the earlier press
release, the only way forward for 1MDB to manage its debt is by listing (IPO)
Edra Energy in Bursa.
But IPO issuance is normally done by company that
possess great potentials, and strong balance sheet that could provide assurance
to potential subscribers for a stable return; not company that is weak and
laggard with unserviceable debt.
No doubt once the debt can be managed properly, 1MDB
has great potentials to excel as a strategic development company but at present
that seems to be very bleak.
Risky IPO
If the IPO is meant to generate extra cash to service
the debt, as pointed by many critiques, still it would not able solve all of
the problem. It could only act as a stop-gap measure as the real valuation of
Edra Energy is still vague to many.
Furthermore who are the potential subscribers?
Normally there are three types of subscribers:
First group: public fund institutions like Tabung
Haji, EPF, KWAP, LTAT and sovereign wealth fund like Khazanah. All of them are
rich in cash.
Second group: international fund institutions like
Temasek of Singapore, employees provident fund from UK, the US, hedge funds and
gigantic insurance companies. They too are rich in cash.
Third group: the retail investors and “men in the
streets” (MITS) who will only able to subscribe very limited amount of shares.
1MDB’s IPO will be facing hurdles from rulings set by
Securities Commission (SC) as well as stipulated guidelines set by investment
panels of the public fund institutions. The investment decision is guided by:
(1) Sectoral Limit
Each of the public fund institutions normally has a vast range and spread of investment portfolios from different sectors. This is a normal practice as part of managing investment risk exposure or in the English adage: ‘don’t put all your eggs in one basket’. This is to avoid systemic risk that could wipe out the overall investment if few invested sectors experienced losses.
For example: if KWAP already have an investment or
shares in energy sector (which they currently have – in Malakoff Corporation
Berhad) and the investment already reached the stipulated ceiling, then KWAP
could no longer invest or subscribe to any IPOs that are issued by other energy
companies.
(2) Single investee limit.
Local public fund institutions also are being
‘capped’ by government – for governance purposes – for not to invest beyond the
stipulated limit.
For example: Let’s say EPF has an investment in our
national oil and gas company PETRONAS which is capped to the amount of RM200
million, therefore EPF can no longer invest beyond that amount. Reason being
government placed such restriction is to allow a fair competition for all
existing public fund institutions to invest in such blue-chip companies that
could provide reliable returns. By doing so not only EPF, but Tabung Haji,
LTAT, and KWAP could also have a slice of the cake.
This is where the regulators like Ministry of
Finance, SC and Bank Negara must make thorough due diligence with proper
strategies (including exit strategy) clearly laid out before deciding to take
Edra Energy public.
Edra as
low-hanging fruit
The hard fact is that the IPO is already well-known
by the public to be a ‘unique’ one. The real intent of going for IPO is to help
1MDB generate more cash in order to service the large debt that was incurred
earlier in both of its principals and interests. This is very important for
1MDB in order to avoid foreclosure, not really about the prospect of future
growth that is normally and clearly visible in ordinary prospectus.
The rate that 1MDB incurs its debt must not exceed
the rate of its revenue generation in order to maintain a well-balanced debt
management. The question is can this IPO for Edra Energy able to generate
returns in short span of time as well as able to ensure its business operation
i.e. concession period runs long enough. We have to keep in mind that the Tun
Razak Exchange (TRX) realty is a long-gestation development. It means 1MDB as a
group could only depend on Edra as its immediate savior.
Judging from market sentiment, going for IPO seems an insurmountable task and will not be that impactful in resolving 1MDB’s cash flow. People already speculated the writing on the wall for the proposed IPO. Prospective investors are afraid that the IPO will end up like Felda Global Venture’s (FGV) IPO which received an euphoric response during the listing but now its shares are languishing in value. The horizon is indeed bleak for 1MDB.
The author is a fellow at Putra Business School. The article first appeared in The Malaysian Reserve, 30th April 2015.
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