MSWG's latest issue of The Observer

MSWG's latest weekly newsletter dated 18-24 January contained two interesting articles:


OCBC SETTLES CIVIL CLAIM WITH THE SC
"OCBC has settled a civil claim with the Securities Commission where it was purportedly involved in
manipulation of DRB-Hicom Berhad shares in July 2011. The settlement was reached following a letter of demand sent by the SC pursuant to its civil enforcement powers.  OCBC was required to pay RM2,475,000, which was equivalent to three times the pecuniary gain of RM825,000, which OCBC had made as a result of the breach. OCBC Bank agreed to settle the fine, though without admission or denial of liability.

MSWG’S COMMENTS:

While we laud the SC for having disclosed the suit and the broad details, we remain unsure as to the substance of the breach and the transgressions involved.  As such we believe that future cases should contain these details."


I agree with MSWG's comments.  Although enforcement has clearly improved over the last few years (which is of course commendable), the explanation of the enforcement is often lacking clarity, to put it mildly. Added to this, I am not in favour of all these settlements "without admission or denial of liability".


KINSTEEL BERHAD (“KINSTEEL”)

The Board of Directors of Kinsteel announced that the indirect subsidiary company of Kinsteel, Perwaja Steel Sdn Bhd (“PSSB”) has defaulted in repayment of Murabahah Medium Term Notes of RM50,000,000 on 29 November 2013.  By virtue of this default, PSSB has cross-defaulted its banking facilities with RHB Bank Berhad, OCBC Bank (Malaysia) Berhad, Standard Chartered Bank Malaysia Berhad and Kuwait Finance House Berhad (collectively known as “the Banks”) totalling RM768,738,785. The reason for the default was due to the company’s inability to generate sufficient cashflow amid the slowdown of steel industry as a result of oversupply and decline in steel prices.
Pursuant to the default, the lenders of PSSB have the right to enforce its rights under the loan documents which include enforcing the various collaterals given to secure the loan/credit facilities granted by the lenders to PSSB, which collateral includes the corporate guarantee given by Kinsteel. 

The extent of the liability of the Company is limited to the corporate guarantees provided to the Banks amounting to RM706,000,000.  Nevertheless, Kinsteel is taking proactive approaches to negotiate with its lenders to arrive at an amicable arrangement to both parties. In addition, PSSB has been granted the abovementioned Order that restrains any actions by the lenders on the guarantees provided by Kinsteel for PSSB’s facilities. According to the opinion of the Board mentioned in the announcement, there is no impact to the business and operations of Kinsteel arising from the default. Kinsteel will be able to continue with its existing business of manufacturing and trading of steel bars and steel related products, which has its own distinct autonomous business operation and management whereby its financial and business operations are independent from those of PSSB.

MSWG’S COMMENTS:

We find it difficult to comprehend that there is no impact to the business and operations of Kinsteel on the default on banking facilities of RM768,738,785 by one of its indirect subsidiary where the exposure of the company to the defaulted banking facilities amounted to RM706,000,000. The company should update shareholders on the financial status of its subsidiaries and associates which are now in PN1 and PN17 status.

The relevant announcement by Kinsteel to Bursa can be found here. The company announced a horrible set of numbers for its nine months until 30 September 2013: a loss for the period of RM 370 Million (of which RM 156 Million attributable to equity holders) on sharply lower revenue of RM 1.2 Billion. The balance sheet also looks very weak, showing RM 1.8 Billion in overdrafts and short term borrowing versus equity of only RM 382 Million.

The share price over the last 2 years: