Onerous terms of Blumont's credit line

I have written little (here and here) about the penny stock saga around Blumont and other connected counters in Singapore. I do hope that the court cases and the investigation by the Singapore authorities will throw more light on this (for many people involved rather painful) affair.

The Edge Singapore highlighted a new credit line of USD 30 Million that Blumont has taken up, the details of which can be found here. In short:

• To be repaid full within 6 months after the first drawdown
• Interest rate of 10% per year, to be paid monthly
• Drawdown fee of 5%
• Administration fee of 0.5% per month
• Arranger fee of 4%

I can not remember I ever saw such onerous terms, I think even any self respecting "ah long" would be embarrassed by these. A back on the envelope calculation gives an annualised yield of well beyond 30% a year including all fees. How many listed companies have a ROCE (Return On Capital Employed) beyond 30% a year? Not many, and I strongly doubt Blumont falls in that category.

In The Edge Singapore Alex Molyneux (not yet appointed as Chairman) remarked:

".... if you 're not an investment-grade company, you don't borrow at 5%, 6%".

But is that really the case? Below is the graph for the yield of the so called "junk" bonds, the lowest grade of corporate bonds:

Many junk bonds are indeed yielding only 5-6%, that seems to contradict Molyneux.

Seth Klarman (Baupost Group) mentioned in Capital & Crisis (December 2013):

"It is almost embarrassing that five years after a crisis - a crisis that can happen again - we're back to those levels of speculative behaviour. It's really astonishing. Everything that can be financed has gotten financed."

The article, titled "The Silly Season", continues:

"You can find good evidence of this in the exuberant corporate junk bond market. This is where the iffy borrowers go and interest rates are high. In fact, it's often called the high-yield market. But today, it seems just about every company has been able to borrow, or refinance, at record-low rates. The High-Yield Index, a proxy for the junk bond market, hit an all-time low in yield this year."

For Blumont, apart from the incredible terms of the loan, there is also the issue how it plans to repay the loan, after only six months. The company owns chunks of not very liquid mining companies that are unlikely to pay any dividend in the near future. If it can't pay back its loan, it might be in danger of losing the assets it pledged against the loan.

And for the global situation regarding risk and return: it looks like we are back to the situation in 2006/07, the "goldilocks" days. Does the world really have such a short term memory, that all the events of 2008/09 have been forgotten?

SC Charges Former CEO of Malaysia Pacific Corp for Insider Trading

Announcement by the Securities Commission:

"The Securities Commission Malaysia (SC) today charged Dato’ Ch’ng Chong Poh, the former Chief Executive Officer (CEO) of Malaysia Pacific Corporation Berhad (MPAC) with 58 counts of insider trading of MPAC shares between 14 May 2008 and 20 August 2008.

All 58 charges preferred against Dato’ Ch’ng were for offences under Section 188(2) of the Capital Markets and Services Act 2007. Dato’ Ch’ng had allegedly acquired the MPAC shares ahead of the entering into of a multi-million ringgit joint venture project between Oriental Pearl City Properties Sdn Bhd, a wholly owned subsidiary of MPAC and Amanahraya Development Sdn Bhd (ADSB), a wholly owned subsidiary of Amanah Raya Berhad, to undertake and manage several projects in the Iskandar Development Region in Johor.

The offences carry a punishment of mandatory imprisonment not exceeding 10 years and a fine of not less than RM1 million.

Dato’ Ch’ng claimed trial to the charges preferred.  Sessions Court judge, Tuan Mat Ghani bin Abdullah who set bail at RM300,000 with one(1) surety also required Dato’ Ch’ng to surrender his international passport to the court.

The SC views insider trading seriously and will continue to actively enforce such breaches to maintain investor confidence in the capital market."

As far as I can remember, this is only the third time ever that someone is charged for insider trading. I am all in favour of more enforcement regarding possible insider trading, just pity that it took six years to file the charges.

The announcement for the project with ADSB can be found here. The project had indeed a decent potential, that is if all would go according to plan. The reader should however be reminded that during the summer of 2008 the global recession started to take shape, culminating in the fall of Lehman Brothers (September 2008).

The share price of MPAC during that period:

Notable is the sudden rise in price and volume starting end of July 2008, about one month before the official announcement of the project.

There are a few interesting issues regarding to this case. First of all, this is a screenshot of the announcements of Bursa Malaysia of MPAC:

In other words, no change in shareholding has officially been reported to Bursa between May and August 2008.

Another issue is that the official announcement of the project was made on August 20th 2008, but that The Edge Malaysia published some details of the deal already in their issue dated August 18th 2008, according to this announcement, which is a reply on a query by Bursa.

Ch’ng Chong Poh has by the way recently resigned as CEO of MPAC on December 19, 2013 according to this announcement.

MPAC is involved in several material litigation cases, for instance here and here, but also in one involving the above joint venture agreement with ADSB.

The last annual shareholders meeting seems to have been a rather heated affair, the company had to issue twice clarifications to Bursa, here and here.

2013 Most popular Blog Postings

I have made a list of the 10 postings from 2013 that received the most hits, plus added some updates on the issues raised:

1. Lending money to a related company is a no-no

Good news regarding Aeon Credit Service, they did cancel their proposed loan facility to its parent company, a nice victory for shareholder activism in Hong Kong.

Panasonic was mentioned as one of the Malaysian companies with a very high amount of funds parked in a related company. Shareholders voted in favour of the related part transaction. According to the latest quarterly result, it looks like there is some improvement in the size though, let's hope it will continue that way:

2. Protasco's Puzzling Purchase

The corporate exercise was announced more than one year ago, RM 50 million cash was parked in an account in Indonesia, a huge amount of red flags surround the proposed deal. There is still no end in sight if this controversial deal will go through or not, and if so under which conditions.


3. YTL Power, why was it listed?

Many companies are delisted in Malaysia, often at (very) low valuations, The Edge (based on research from RHB) expected that might happen to YTL Power: "A languishing stock price could potentially turn YTLP into a privatisation target.".

The good news for its shareholders is that the share price went up, quite a bit even from its lows at RM 1.40, making a possible delisting less likely:

4. 10 Worst Corporate Accounting Scandals

Unfortunately very US centric article, who will write a similar article about the 10 Worst Malaysian Accounting Scandals?


5. China Stationery: too many red flags and what does "demised" mean?

I still don't know what "demised" means in the announcement, I guess we have to wait for the year report. The auditors have intended to resign, another red flag to add to an already long list.


6. Marc Faber: China could spark a bigger crisis than in 2008

Marc Faber is a great analyst who has been proven right many times. His nickname is Dr. Doom, and he is rather gloomy at the moment, investors should take heed.


7. SPAC's: Boon or Bane?

I have been very critical about SPAC's from the start, this was my first article about the matter, many more followed. One snippet from the first article:

• SPAC's are very good for the managers, they have almost nothing to lose and still earn good wages
• The verb is "you can't have your cake and eat it", but SPAC's managers prove the verb is wrong
• Minority shareholders pay for the dilution by and fees for the managers, and carry almost all of the risk

These issues have been correctly changed by the Securities Commission, details can be found here. Founders and initial investor now have to put their money where their mouth is, and wages for managers are reduced. Good steps in the right direction, although I would still simply prefer to abolish SPACs altogether.

8. Fed up about the Fed

I am not an economist (nor will I ever be one), but I do like the Austrian school (Carl Menger, Friedrich Hayek, Ludwig von Mises, Marc Faber). Basically they don't like any interference with the economy whatsoever. Entrepreneurs must know that if things turn sour, there will be no safety net, there needs to be clear feedback from the real world to them to correctly assess the risks involved.

Greenspan however introduced the "Greenspan put" which later turned into the Bernanke put. There is the important issue of moral hazard. While the middleclass in the US is struggling and real wages have fallen, the top 1% is doing extremely well. The extremely rich  should raise a statue for Greenspan, Bernanke and (in the future) Yellen, they owe a lot to them.


9. Protons marketshare slipped from 80% to 18%

Not being a listed company it is less in the limelight than before. A pity, since a healthy dose of sunlight (in the form of transparency) is often helpful.


10. Masterskill in timing the IPO & Goldman Sachs

Not long after this post Masterskill posted a shocking loss. Many Malaysian companies have failed from the moment they were listed, and unfortunately the authorities have hardly ever taken any action. I hope they will do a thorough, investigative research in this case, since there are (too) many red flags.


One posting just didn't make it in the Top 10, but it is my favourite over the year so I still like to mention it:

Maemode: accurate predictions by Ze Moola, but why did nobody notice?

Ze Moola has blogged in "Where is Ze Moola" since 2005 more than 3,000 articles! That in a time when Corporate Governance was not yet very common or popular. He has unfortunately stopped, not sure for what reason. But these days others have stepped up, The Edge was the first in this area, MSWG is doing its work (a larger part probably behind the scenes), the business section of The Star (Errol Oh) has improved, there is Focus Malaysia and KiniBiz, also newer bloggers like Serious Investing have joined.

Ze Moola was many times right and will be proven more often right in the future. Some cases just need years to pan out, like in the Maemode case.

One week ago it was announced that Maemode still can't issue its audited annual accounts nor its quarterly accounts. Enough reason for Bursa to suspend trading in Maemode's shares, if not for the reason that the shares were already suspended.

I hope that the authorities will thoroughly investigate Maemode, especially its long history of large receivables which "were not able to receive".


Seth Klarman (from Baupost fame) said recently:

"It is almost embarrassing that five years after a crisis - a crisis that clearly can happen again - we're back th those levels of speculative behaviour. It's really astonishing."

Below the fireworks of Dubai 2014, which went down in the 2008 global crisis, but looks to be back again in the limelight.

Wishing all readers a Happy New Year!

"Listing of IOI Properties rushed and ill-timed"

Article on the website of The Star: Listing of IOI Properties ‘rushed and ill-timed’:

"Minority shareholders claim listing of IOI Properties rushed and ill-timed".

Details follow, mostly from remisiers on behalf of their clients:

• "as most of them (their clients) were away for the holidays or had yet to receive the necessary documents by post"
• "While the application is downloadable from Bursa Malaysia’s website, a remisier said this put senior citizens at a disadvantage. “Many of them don’t have access to the Internet. It shows a lack of concern for shareholders,” he said."
• "Stockbrokers are not authorised to sign on behalf of clients. We can try to help one or two clients, but not if it involves thousands of ringgit"

Rita Benoy Bushon, Chief Executive Officer, Minority Shareholder Watchdog Group, is even more outspoken in "The Observer, Message from the CEO", dated 3 January 2014:


"Minority shareholders of IOI Corp Bhd have every right to feel disgruntled by the short space of time given to subscribe for their entitlement for shares of its soon-to-be-listed IOI Properties Bhd.
 
Although the Company has announced the book closing date of the ROS (Restricted Offer Shares) on 19 December 2013 which is at least 11 market days before the date of application according to the Main Market Listing Requirement, it nevertheless had only issued the prospectus on 26 Dec 2013, which is a mere five working days before 2 January 2014, if the public holidays and weekends are excluded.

IOI should have realised that by conducting this exercise over the vacation period, many people may be on leave, postal deliveries could also be delayed in this period, which also meant that many may not have received the necessary documents by post on time. (Thus the complaints are valid.)

The company should really have given minorities more time to subscribe for their entitlements.
 
We view this as especially serious since it has been the subject of criticism following its delisting in 2009 (being bought out at just 0.66 times NTA for a RM1.3 billion valuation).

We hope IOI Corp will further extend the closing period for the application (noting that they have already done so today by 4 days) and show their good faith to the current minority shareholders, who are expected to be keen to take advantage of the offer. The reason being, that each IOI Properties share at RM1.76 under the ROS comes at a 30% discount to the reference price of RM2.51. In addition, an even steeper 42.7% to IOI Properties’ pro forma net asset per share of RM3.07. Otherwise, it could be construed negatively by the public that the offer not taken by entitled shareholders (for reasons beyond them) would be given to other shareholders at the discretion of the Board, at a discount."


I have written before about this IPO: "The return of IOI Properties" and "IOI Prospectus, 1623 pages!".

The only good news I can bring is that the length of the IPO prospectus is indeed brought back to 750 pages, a reduction of almost 1000 pages, although for me, it is still much too long.