Debt has always been an efficient tool?

Article in The Star: "Debt raising vital for Khazanah stable of enterprises"

One snippet:

"DEBT has always been an efficient tool for finance and investment and it comes to no surprise that the list of companies that have the largest amount of debt includes some of the largest companies on Bursa Malaysia."

That is a rather remarkable statement in itself. 

I would therefore like to add some counterweight:

"Debt has also always been an efficient tool to bancrupt a company in the fastest possible way".

There are worldwide many, many examples of companies that used too much debt and did not live to tell the tale.

One reason for the increased risk of bancruptcy is that earnings are simply too low (or even negative) to sustain the debt payments.

Another reason is that despite having reasonable earnings a company might run into cashflow problems.

The stable of enterprises of Khazanah might have more options to increase debt even more (through Khazanah), but that might not always lead to the desired outcome and even increase the problem. MAS might be one example in this category.

Also, easier debt from a GLF like Khazanah might give a company a possibly unfair advantage over its privately funded rivals.

An example of a heavily indebted company outside the Khazanah stable is 1MDB, a story that most likely will end very costly for the Malaysian taxpayers.

Does Malaysia really need another fund?

Article in The Malaysian Insider:

"VCAP Asset Managers launches fund to invest in blue chips"

With so many GLFs (Government Linked Funds) already, do we really need another fund?

Given the recent events, would it not be better to freeze all existing funds launches and pay more attention to the very backbone of Malaysia? In other words, to significantly shore up the institutions, in terms of transparency, responsibility, independence, etc.?

Also, would it make more sense to redeem some government loans with the money, instead of dabbling in the local share market, something that is best left to private players?

One snippet of the above article (emphasis mine):


"But because this is an actively managed fund, hopefully you'll get decent outperformance above and beyond blue chip returns"


Can the CEO of VCAP give some facts regarding the possible outperformance?

It is a well known fact that in the US the large majority of the actively managed funds underperform their respective benchmark. Would this be any better in Malaysia?

I personally believe in two extremes:

• Passively managed funds, investing in a basket of shares with the lowest possible management fee (a small fraction of one percent): ETFs.
• Actively managed funds, run by fund managers with a long history of outperformance; often these managers have a contrarian, maverick streak in them.

VCAP is a unit owned by Khazanah, KWAP and PNB, the words "contrarian" and "maverick" do not exactly come into my mind when I think about them.

1MDB needs a new script

An article written by Anita Gabriel with this title appeared in The Business Times (Singapore) today, some snippets:


"Another thing that will serve the fund and its communication team well is to rid itself of the notion that all its critics have a political agenda.

That's undeservedly self righteous for a fund that has racheted up over RM40 Billion in debt, rolled over a RM2 billion debt three times over a year, switched auditors and bosses twice and is in the red to the tune of RM665 million in 2014."


I fully agree with this. Most likely it is in reference to (for instance) this article in The Malaysian Insider:

"1MDB’s critics politically driven, don’t know full facts, says new chief"

The seasoned investment banker said it was "quite clear" most of the allegations directed at the company had been driven more by "political rather than genuine business considerations", he told The Malaysian Insider in an email interview.


There have been many excellent articles about 1MDB by publications like Bloomberg, Reuters and The Business Times (Singapore). Surely these were not political driven.

Besides that, there were many other excellent articles from Malaysian publications like MalaysiaKini/KiniBiz and The Edge.

Everyone is interested in transparency, not in some sort of blame game.

Definitely not a good start by the new CEO of 1MDB, the remark about political motives.

Myself I am very interested in the funds 1MDB invested in (either currently or in the past). 1MDB has never been transparent about them, as far as I am aware.

According to this article:


"Australian firm Avestra Asset Management has been managing over US$2 billion of 1Malaysia Development Bhd's monies invested in several Cayman Islands funds."


Avestra was recently fined by the ASIC (the securities commission of Australia) for having committed six offences.

Controversial blogger "Dr Benway" wrote about this same issue (AG Financial) long before ASIC had fined the company (here, here and here). Please note that I can in no way guarantee the correctness of the postings by "Dr Benway".

Based on their own website it seemed that Avestra's business is run from a house or apartment on Australia's Gold Coast, which seems to be peculiar for an asset management company managing billions of RM:

The above seems puzzling. 1MDB should be transparent about the details of the funds it invested in, the rationale behind the decision, if it paid commissions (and if so, how much and to whom), the returns it received, the due diligence it had performed, etc.

Anita Gabriel recommends 1MDB to follow in the footsteps of Khazanah Nasional:


"It took Khazanah half its live span or ten years to turn its back on the secretive-style of investing which had previously drawn huge public outcry in the country

These days, the annual events where Khazanah provides some key indicators and updates on its investments are markedly more staid, relatively dull even; and that's a good thing. Transparency begets trust which begets credibility, all of which 1MDB is in deficit at this point."

Proton: possible Insider Trading, was EPF one of the victims?

Te recap: on January 16, 2012 DRB-Hicom announced that it would buy the shares of Proton from Khazanah Nasional for RM 5.50 per share and that it would make a Mandatory General Offer for all other shares. But up to that date, the share price of Proton had increased by about 100% in high volume since the first half of November 2011, giving rise to suspicion of insider trading, possibly in a large scale.

The chain of events (official announcements to Bursa Malaysia in red):

14-11-2011 Protons shares are thinly traded around RM 2,70 per share, in low volume of about 300,000 per day, as was normal for the preceding two months.

15-11-2011 The share price takes off, it closes at RM 3.21 in brisk volume of 4,300,000, more than ten times higher than the average volume in the previous days.

The trading volume in Proton shares will stay very high in the coming 12 trading days, averaging 4,400,000 shares.

17-11-2011 Article in The Star: "Research analysts and stockbrokers are surprised by the sudden surge in Proton's share price. They say the marketplace is abuzz with all sorts of rumours.".

3-12-2011 Article in The Star: "Speculations that Proton Holdings Bhd is once again a subject of a takeover or a management buyout persisted as the share price of the national auto maker spiked on Friday, rising to a nine-month high at 51 sen to RM3.61 a share."

5-12-2011 The volume has increased to more than 20 million (60 times its normal volume in the first half of November 2011), the price jumped further up from RM 3.82 to RM 4.50.

Bursa Malaysia finally issues an "UMA" (Unusual Market Activity) enquiry, three weeks after the share price took off in unusual high volume. This day represents the vertical line in the above graph.

6-12-2011 Proton announces: "The Board of Directors of PROTON wishes to clarify that after making due enquiry with the Board of Directors and major shareholders, the Company is not aware of any reason for the unusual market activity in the shares of the Company recently, and further, that there is no material corporate development not previously disclosed.". Khazanah Nasional is a major shareholder of Proton.

The article in The Star of that day: "Euphoria is in the air for Proton Holdings Bhd as its share price put on 89 sen or 24.6% to close at RM4.50, amidst talk that its largest shareholder, Khazanah Nasional Bhd, is divesting its stake in the national carmaker. A weekly reported that Khazanah was likely to ask for business proposals from parties interested in its 42.7% stake in Proton.".

8-12-2011 DRB-Hicom announces: "We refer to Bursa Malaysia Securities Berhad’s (“Bursa Malaysia”) telephone query on Thursday, 8 December 2011 regarding the above article appearing in page 1 of Starbiz section, The Star newspaper dated 8 December 2011. In this regard, we wish to inform Bursa Malaysia that the Company is not aware of the source and the basis of the article."

The article in The Star: "DRB-HICOM Bhd's bid for control over Proton Holdings Bhd is likely to include the presence of Volkswagen AG at a later stage, a reliable source said. DRB-HICOM's plan is to first secure a controlling block in Proton. But at a later stage or second phase of the deal, DRB would divest some of its equity to Volkswagen, resulting in both parties sharing control and management in Proton, the source said. Such a structure could make the deal more desirable, considering that it moved away from the prospects of Proton falling into the hands of a foreign party, an issue which was likely to have been part of the reasons why previous attempts by Volkswagen to buy into Proton were scuttled."

12-12-2011 Article in The Star: "Proton adviser Tun Dr Mahathir Mohamad said that Khazanah was selling because it was not pumping more money into Proton, which needed funds for research and development work on new products such as hybrid cars. “I worry about the buyer (DRB-HICOM) having enough money to inject into Proton. The shares it will be buying are above market price, which will make profitability difficult,” Dr Mahathir said after delivering a speech at the MIDF Investment Forum organised by MIDF Amanah Investment Bank Bhd".

13-12-2011 Announcement by Proton: "The Board of Directors of Proton Holdings Berhad wishes to inform that after making due enquiry with the Major Shareholder, Khazanah Nasional Berhad ("Khazanah") has informed that, in its normal course of business, it regularly receives proposals, enquiries and expressions of interest in relation to its various investments and companies where it has interest in, including Proton.  Khazanah will make necessary disclosure at the appropriate time."

Article in The Star: The time has come for Khazanah Nasional Bhd to state its intentions about its 42.7% stake in Proton Holdings Bhd. With so much speculation on Khazanah's possible divestment plans, it would only do Khazanah and the market good if it said something more than the usual “We don't comment on speculation”.

28-12-2011 Article in The Star: "Persistent rumours about a possible takeover had resulted in spikes in Proton's share price in recent weeks. Among the names linked to the takeover included local automotive assembler DRB-HICOM Bhd, the Naza group (the country's largest privately held automotive group), Sime Darby Bhd and UMW Holdings Bhd.".

31-12-2011 Article in The Star "Should Proton Holdings Bhd go to DRB-HICOM Bhd?"

5-1-2011 The volume increases further to 9,500,000 shares, the share price closes above RM 5.00.

6-1-2011 Article in The Star: "The share price of Proton Holdings Bhd jumped to an intra-day four-year high of RM5.16 as talk and speculation on state fund Khazanah Nasional's 42.7% stake sale in the national carmaker intensify..... Industry observers said DRB-HICOM seemed to be the front-runner in the fight for the stake".

9-1-2011 The volume is 8,700,000 shares.

DRB-Hicom announces regarding the article "Bid for Proton Stake": "We refer to Bursa Malaysia Securities Berhad’s (‘Bursa Malaysia”) telephone query on 9 January, 2012 regarding the above article appearing in the various newspapers dated 9 January 2012. We wish to inform Bursa Malaysia that DRB-HICOM has always viewed Proton Holdings Berhad (“Proton”) as an important automotive industry player and accordingly DRB-HICOM was on the look-out for when opportunity will arise to explore any viable proposal(s) which will benefit and add value to the Group’s business and expansion plans. In this regard, the Company has submitted a bid for the acquisition of Proton’s shares held by Khazanah Nasional Berhad (“Khazanah”). As at to date, the proposal is pending decision by Khazanah.".

12-1-2011 15.9 million shares are traded between RM 5.34 and 5.49

13-1-2011 11.8 million shares are traded between RM 5.18 and 5.53

16-1-2011 Proton shares are suspended and the announcement is made that DRB-Hicom will buy over the shares for RM 5.50.


The above chain of events make a bad overall impression. It looks very much that certain parties where privy of inside information.

Why was Bursa Malaysia so late with its Unusual Market Activity query? The share price of Proton had increased already over 3 consecutive weeks by a whopping 70% while the daily turnover had risen 20-fold when it finally took action.

The announcement on December 6, 2011 by Proton looks puzzling to say the least. The market was rife with rumour, but Proton nor Khazanah Nasional wasn't aware of anything at all?

The fact that the share price was more or less capped on RM 5.50 on the days before the final announcement on January 16, 2011, do suggest that certain parties might have known the price that DRB-Hicom would offer.

Also, both Proton and DRB-Hicom appeared remarkably passive in issuing announcements, both only responded on queries from Bursa Malaysia (most notably on December 6, 8 and 13, 2011 and January 9, 2012) from Bursa Malaysia, they didn't initiate these announcements themselves.

From Bursa Malaysia's website: "We place significant emphasis on timeliness, adequacy and accuracy of disclosure to enable investors to make informed investment decisions.". Was that really the case in the above corporate exercise? I have strong doubts about that.

Who are the victims of the possible insider trading? Everyone who sold his shares between November 15, 2011 and January 16, 2012. EPF is definitely one of them:

Disposed 16/11/2011  500,000 
Disposed 17/11/2011  50,000
Disposed 24/11/2011  4,392,300 
Disposed 30/11/2011  2,714,000 
Disposed 30/11/2011  2,000,000 
Disposed 02/12/2011  1,000,000
Disposed 02/12/2011  1,000,000 
Disposed 02/12/2011  1,000,000
Disposed 05/12/2011  441,300 
Disposed 05/12/2011  1,000,000 
Disposed 06/12/2011  100,000 
Disposed 06/12/2011  577,800 
Disposed 16/12/2011  60,000

EPF sold about 15 million shares of Proton, for a price clearly below the MGO price. If the buyers of these shares were trading with insider information, then EPF was disadvantaged for an amount of roughly RM 20-30 million on those trades.

Will EPF take any action? Until now, they have always been as quiet as a mouse, so I would not count on it.

Previous posts about this issue:

http://cgmalaysia.blogspot.com/search/label/Proton

Worrisome words from the Khazanah MD

http://www.btimes.com.my/Current_News/BTIMES/articles/astro31-2/Article/index_html#ixzz1csyY1UD8

"Pay television operator Astro All Asia Networks plc is best taken private at this stage of its development, the chief of its major shareholder Khazanah Nasional Bhd said.

"We feel in its current stage of development with high definition television and the Indian investment, it is time when it needs to be taken off the market. I think you get better value ... but the debt market gets developed as a result," managing director Tan Sri Azman Mokhtar told reporters on the sidelines of the Invest Malaysia conference yesterday.

"But you can see the track record of the Usaha Tegas group ... they eventually go back for a listing," he said, referring to the recent re-listing of the group's Maxis Bhd.

Khazanah, which owns about 21.4 per cent of Astro, together with other owners Usaha Tegas Sdn Bhd and Bumiputera foundations had on March 17 offered to buy out minority shareholders of Astro at RM4.30 a share.

Astro closed up 2 sen at RM4.28 yesterday."

I am getting very worried when highly influential people, like the MD of Khazanah, utter these kinds of words. Do they actually understand the implications of what they say? From a corporate governance point of view the implications are simply horrific. Like there is some sort of "game" going on, where the big players (the majority shareholders) can list, privatize and relist companies at will, at a moment and price that is convenient to them.

Taking a listed company private is a nice way to describe the process in which minority shareholders are kicked out of a company, often at low prices (sometimes at very low prices). It starts with making all kind of "threats" to shareholders holding shares in unlisted companies, shares for which no ready market exists, and with clearly less legal avenues for complaints. If minority shareholders don't want to sell, then their shares can be mandatory acquired when certain thresholds are breached. Independent advisers are supposed to come with unbiased reports, but in almost all cases they are hugely biased, favoring the major shareholders, urging the minority shareholders to indeed accept the (very) low offer price. Finally, there is a huge information bias, the majority shareholder has much more inside information about the company (both about the current conditions and the future outlook) than the minority shareholders.

Unfortunately, these practices happen a lot in Malaysia. And the fact that the majority shareholders can get away with it and the minority shareholders hardly have any chance to fight them, doesn't make it right, in the contrary. Rules have been improved somewhat lately, but there is still much to do, for instance authorities still have never bothered to come down on independent advisers that issue biased reports.

In my opinion, companies should not be taken private, unless there is a very clear reason for it (the company has hardly any business left and the liquidity of the shares is extremely low), which is often not the case at all. Shareholders invest in companies based on long term projections, it is simply unthinkable if (for no aparent reason) they are forced out of their shares, against their will.

And secondly the price offered should be fair and reasonable, beyond any doubt:

• It should be at a clear premium to its average last traded price
• It should not be at a discount to its net asset value.
• The Board of Directors should have made attempts to unlock the value of the assets (for instance by holding auctions).

For this we need better rules and much more active enforcement by SC and BM.

Below my encounter with the above mentioned Usaha Tegas group in the privatization of Bumi Armada (Barmada), and its subsequent relisting again.

In 2003 Barmada’s Minority Investors received a notice that there would be a General Offer (GO) for their shares, that the Majority Investors had no intention to continue with the listed status of the company, that no dividends might be paid, that rights issues might be necessary for further funding and that shares would be mandatory acquired if certain thresholds were reached.

Please note that the GO in itself is good, but the company should not be allowed to use the delisting threat. In this case the offer was for only RM 7 per share, with net earnings per share of RM 1 and growing nicely, an excellent balance sheet and one of the highest Return on Equity’s (more than 20%) of the whole Bursa Malaysia. The offer price was horrific low by any standard, there was no premium, the share price had been clearly higher before at which price I (and other Minority Investors) had not sold my shares. The PE of about 7 compared with PE’s of 15 to 20 of similar, much lower quality companies.

The circular was (as usual in these kind of exercises) of very low quality, lots of important information was left out (despite Full Disclosure based Regulation). In this case the Majority Investors try to paint as bleak as possible picture of the company’s future (to try to convince the Minority Investors to sell at the low price).

I filed a complaint with the Securities Commission, was asked to come to the office twice, but these talks turned out to be fruitless. I pointed at the following very important rules (emphasis is mine):

(a)    that the shareholders and directors of an offeree and the market for the shares that are the subject of the take-over offer

(i) are aware of the identity of the acquirer and offeror;  

(ii) have reasonable time in which to consider a take-over offer (A); and  

(iii) are supplied with sufficient information (B) necessary to enable them to assess the merits of any take-over offer;  

(b) that, so far as practicable, all shareholders of an offeree have equal opportunities to participate in benefits accruing from the take-over offer, including in the premium payable for control (C);  

(c) that fair and equal treatment of all shareholders, in particular, minority shareholders (D), in relation to the take-over offer, merger or compulsory acquisition would be achieved; and  

(d) in its response to, or making recommendations with respect to any take-over offer, merger or   compulsory acquisition, the directors of the offeree and acquirer shall act in good faith (E) to observe the objects, and the manner in which they observe the objects, specified in this subsection,

and that minority shareholders are not subject to oppression or disadvantaged by the treatment and conduct of the directors (F) of the offeree or the acquirer.  

My comments regarding the implementation of these rules in the Barmada case:

(A): the time to consider the take-over offer, to study the documents, to try to rally other Minority Investors, to contact the MSWG, to try to write articles for newspapers & magazines was extremely short and definitely nor reasonable at all, and the important “independent” report was send even much later to the Minority Investors, there was hardly any time to react on it.

(B): lots of important information was missing, like: What is the sales pipeline? What are the profit projections for the coming years? No recently audited Profit & Loss or Balance Sheet was given.

(C): there was no premium at all let alone for control, the price was based on an artificial low price at which certain bondholders of Barmada’s parent company were prepared to sell.

(D): this rule, which is so clear and important is never ever used by SC/BM. It should however, in any case where there is doubt, and in the advantage of the Minority Investor.

(E): by cutting the dividend, not giving a reason for that and providing inadequate information directors breached the listing rules that explicitly require this information.

(F): again, it cannot get clearer than this rule, why is it never used by SC/BM?

I contacted the MSWG, was supposed to meet the CEO but only met two analysts who didn’t know anything about the case. Later there was supposed to be a meeting with other fund managers, but I never received an invitation. MSWG did not put up any fight at all, very disappointing.

My complaints to SC and BM lasted a very, very long time, no information was ever given in the meantime, and finally (after almost three years) both came to the same conclusion, nothing wrong had happened. First of all very strange given all the clear evidence I had given of the opposite (I had provided many pages with detailed information about the issues involved). Secondly SC/BM both didn’t want to point out any reason at all for its decision. I was clearly stonewalled by both institutions.

Barmada has since relisted recently. After taking into account the bonus and rights issues, the current price corresponds to about RM 140 in 2003 terms, in other words a 20-fold increase in price, for each lot of 1,000 shares investors would not receive the paltry RM 7,000 but RM 140,000 (my friends, my relatives, my wife and my company owned dozens of lots in total). 

In the relisting exercise, it was important for the Majority Investor to paint a picture as rosy as possible. The contrast with the GO brochure of 2003 was very stark. Bursa Malaysia, who should look into this and assure that information is of the same level aparently turned their head the other direction. The reason why the majority shareholder of Barmada wanted to delist in 2003, the very low delisting price (at the current amount of shares the equivalent to only RM 0.20), the pressure that was put on the Minority Investors, the way Minority Investors were treated in the past, all was conveniently left out of the relisting circular although the circular contained more than six hundred (!) pages.

The total market value of the shares that were acquired by the Majority Investor from the Minority Investors has since increased by RM 2,500,000,000! In 2003 Barmada had thousands of shareholders, many of the larger minority shareholders were funds with each again thousands of unit trust holders. If a total of 50,000 people were invested in Barmada (either directly or through unit trust funds), then this would mean that RM 50,000 per person of value was created, in which they were not allowed to share.

More information about the Bumi Armada case:
http://www.apolloinvestment.com/pirates.htm
http://whereiszemoola.blogspot.com/search/label/Bumi%20Armada
http://cgmalaysia.blogspot.com/2011/08/over-prescriptive-regulation-and-bumi.html