Port Klang Free Zone
The Port Klang Free Zone (PKFZ) was mooted by the government in 2000 to turn a 1,000-acre piece of land adjacent to the Klang port into a regional industrial park.

In 2002, the Port Klang Authority (PKA) — the regulatory body set up to oversee the development of PKFZ — purchased land from Kuala Dimensi Sdn Bhd (KDSB) for RM1.08 billion, repayable by 2017 at 7.5% per annum.

PKA also engaged KDSB as the developer of the first 400 acres under a separate agreement. In February 2003, PKA signed a development agreement with KDSB to develop the first 400 acres for RM400 million, with a supplementary agreement signed in May 2003 to facilitate the raising of funds by KDSB.

In that same month, then Transport Minister Tun Ling Liong Sik issued a letter of support to KDSB for the RM400 million development agreement. KDSB, via Special Port Vehicle Bhd, issued RM1.3 billion in bonds, secured against payments from the RM1.08 billion land sale.

In March 2004, a supplementary agreement was signed, engaging KDSB to develop the entire PKFZ for RM1 billion in a single phase. A month later, Transport Minister Tan Sri Chan Kong Choy issued a letter of support for the agreement.

Matters came to a head when the auditor-general said PKA did not have sufficient financial resources to meet its obligations.

However, between 2004 and 2006, KDSB issued RM1.4 billion worth of bonds via Transshipment Megahub Bhd, secured against the development agreement.

In November 2005, PKA awarded KDSB an additional development works package for RM510 million, repayable by 2011 at 5% per annum. In December, a second letter of support for the additional development works was issued. Between March 2006 and December 2008, KDSB — via Valid Ventures Bhd — issued RM595 million worth of bonds, secured against the additional development works.

PKA awarded new additional development works to KDSB for RM336 million in April 2006, which came with a third letter of support from Chan. In September 2006, KDSB issued RM410 million worth of bonds via Free Zone Capital Bhd, secured against the new development works.

PKFZ was launched in November 2006. However, the government revised the development costs to RM4.6 billion from the initial RM2.3 billion.

In July 2007, the Finance Ministry approved a RM4.6 billion soft loan for PKA to meet its financial obligations, including its bondholders. However, according to a PricewaterhouseCoopers position review report that was commissioned by PKA, the costs could balloon to RM12.5 billion if PKA did not take steps to restructure the RM4.6 billion loan.

In January 2010, the Malaysian Rating Corp Bhd (MARC) affirmed all four special purpose vehicle debt issuances with triple-A ratings, on the basis of the support by the federal government to meet the repayment to bondholders. In the latest development, Ling — one of the central figures in the PKFZ scandal — has been charged with deceiving the government over the purchase of land.

Malaysian International Tuna Port
Malaysian International Tuna Port Sdn Bhd (MITP) was set up as a private-public joint venture in 2004 to undertake the privatisation and maintain a port for the processing and trading of tuna fish in Batu Maung, Penang. MITP’s two main shareholders are Bindforce Sdn Bhd, with a 60% stake, while the Fisheries Development Authority (LKIM) holds the other 40%.

MITP issued RM240 million Bai’ Bithaman Ajil Islamic Securities (BAIS) in May 2007, which MARC assigned an A+ID rating based on the stable outlook for the bonds.

The lead arrangers for the bonds were OSK Securities Bhd and RHB Investment Bank Bhd. Both investment banks also subscribed for RM120 million worth of the bonds each when it was first issued. However, it is said that the institutions were able to sell down a significant portion of their holdings because of the market confidence in the bonds.

MITP’s bond issuance was accompanied by a letter of support from the Ministry of Agricultural and Agro-Based Industry (MOA) to back the rated obligations. However, in October 2009, MARC downgraded MITP’s BAIS to BB+ID from A+ID, and maintained a “negative watch” on the debt papers, owing to MITP’s liquidity constraints. This was because construction work at the Batu Maung port had stalled for over a year following a stop-work order issued by the Department of Environment (DOE) in September 2007. Although the stop-work order was lifted a year later, construction works did not resume.

It is said that the land for the port overlapped that of the site on which the construction of the Second Penang Bridge was supposed to take place. By that time, RM85 million had already been drawn down for the construction of the tuna port.

Thus, MITP’s operations did not commence, causing the group to face cash flow problems. In its ratings report on MITP, MARC said its Finance Service Reserve Account 2 (FSRA 2) account was already exhausted even though construction work had not been completed.

The FSRA 2, which is used for depositing and maintaining funds for profit payment due and payable during the construction period, is handled by OSK Trustees Bhd. MITP had to come up with four half-yearly profit payments amounting to RM40.83 million to service the payments during the construction period.

MITP had intended to refinance the BAIS via bank borrowings and was bringing in a government-related entity (GRE) as a new shareholder in MITP via a new-shares issuance. The GRE was supposed to take up a 40% stake, worth RM32 million, in MITP.
But by October 2009, the capital injection had not been received due to pending approval from various ministries. The bonds defaulted in November 2009.

Pesaka Astana
A decade of experience in supplying vehicles to the Ministry of Defence (MinDef) did not stop Pesaka Astana (M) Sdn Bhd (PASB) from defaulting on its obligations to bondholders.

In 2004, PASB issued RM140 million worth of  Al-Bai Bithaman Ajil Islamic bonds, which was rated A+ID by MARC.

PASB’s bonds issuance did not have a letter of support or any explicit government guarantees. Nevertheless, its fundamentals were backed by its numerous government contracts. The contracts were mainly to supply vehicles to MinDef and the Fire and Rescue Department.

In September 2005, Mayban Trustees Bhd said PASB had not met its repayment to bondholders, amounting to RM34.2 million, resulting in a default of the bonds.

In 2006, the bondholders — mainly banks and discount houses — sued PASB CEO Datuk Mohamad Rafie Sain and wife Datin Murnina Sujak, who was a company director in PASB. Apart from Rafie and Murnina, bondholders also sued PASB, Mayban Trustees and KAF Discounts Bhd, which was the lead arranger of the bonds.

The bondholders alleged that Mayban Trustees had acted negligently in ensuring the proceeds of the government contracts were deposited and maintained in the trustee accounts, and that KAF had not ensured that Mayban Trustees was the sole signatory of the accounts before allowing PASB to issue the bonds.

In a landmark decision in June 30 this year, the High Court found Mayban Trustees and KAF liable to PASB bondholders and ordered the institutions to pay the bondholders.

This article appeared in Corporate page, The Edge Malaysia, Issue 818, Aug 9-15, 2010