Unlisted & Unlimited: Providing SMEs with much-needed financing

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WHEN Malaysia Debt Ventures Bhd (MDV) started out in 2002 as a division of Malaysia Venture Capital Management Bhd (Mavcap), it was supposed to address a critical gap in the information and communications technology (ICT) funding ecosystem. At the time, the companies were mostly start-ups, fuelled by dreams of Silicon Valley but with very little real value to offer as collateral.

The government encouraged the growth of such companies by awarding contracts for so-called “flagship” platforms and applications, such as e-government, MyKad and telehealth. There was one problem though. Even if these companies managed to secure contracts, they were unable to act on them as the contracts were not considered good enough security by the banks. The venture capital fraternity, meanwhile, held back from investing because of a lack of exit opportunities in Malaysia.

At the time, Jiro Suzuki (who went on to become the first head of Mavcap’s debt ventures division) was a financial adviser for the flagship applications of Multimedia Development Corp (MDeC). Through his contacts in Japan, he heard that the Japanese government would be announcing an “e-Asian” initiative, setting aside US$15 billion (RM52.5 billion) to narrow the digital divide between relatively backward Asian countries and their more technologically developed counterparts within Asia and the West.

Suzuki applied for a loan under the aegis of MDeC even before the initiative was announced by then Japanese prime minister Yoshiro Mori. In February 2002, the Ministry of Finance signed an agreement with the Japan Bank for International Cooperation (JBIC) for a RM1.6 billion loan that would be channelled to Mavcap’s debt ventures division.

In 2007, the ministry approved RM2.5 billion for MDV’s second fund. It offered three types of funding — project-based loans, bank guarantees and export financing. The project-based loan, based on a secured contract from a stable company, was essentially a bridging loan — once the company secured a contract for an ICT project, it could bring the contract to MDV and apply for up to 85% financing.

Meanwhile, the bank guarantees allowed banks to participate in the financing of ICT companies. And with MDV guaranteeing the loans, the banks had virtually no risk. They eventually became familiar with the sector and started to finance such companies on their own.

The export financing scheme was aimed at customers that had secured overseas contracts. These firms could obtain financing by providing MDV with a letter of credit from their foreign client.

Now in its 12th year, MDV has disbursed RM8 billion in loans to 250 companies in the ICT and other high growth sectors. Its mandate now includes green technology and biotechnology start-ups as well. According to managing director and CEO Datuk Md Zubir Ansori Yahaya, MDV is uniquely positioned in the financing ecosystem.

“If you look at financing, there are various sources, such as banks, the stock market, venture capitalists (VC), grants, loans and other equities. We are part of the VC space, which is early-stage funding,” he says. “If you go through a life cycle of a company from start-up to IPO, there are various stages, and different stages require different types of funding. This is where MDV positions itself — early-stage financing in the form of debt funding.”

Md Zubir feels that the expansion of MDV’s mandate by the government is a testament to its success. “By allowing us to include other sectors, it means that we have been successful in carrying out our mandate. We would not have expanded into biotechnology and green technology had our initial mandate not been successful.”

In 2008, MDV raised another RM1.5 billion from the domestic market via a sukuk offering. Companies that it has financed include Aquawalk Sdn Bhd, the owner and operator of Aquaria KLCC; MOL Global Pte Ltd, which is listed on the NASDAQ Stock Market; and Graphene Nanochem plc, which is listed on the London Stock Exchange’s Alternative Investment Market.

“When these [start-up] companies came to MDV, their revenues were less than RM1 million or RM2 million. Today, their turnover has grown to

RM15 million to RM30 million,” says Md Zubir. “To us, these are success stories. These companies would not have been able to get funding had it not been for MDV’s existence.”

He attributes MDV’s success to the approach it takes in financing companies. He points out that there was (and still is) a gap in funding biotechnology and green technology companies when these sectors were identified as priorities, as banks were (and still are) unwilling to take the risk. Banks typically lend to companies with an established track record, and this is something start-ups do not have.

“In our lending, we focus not so much on the gearing of a company, like the banks do … but more on cash flow financing,” he says. “We focus a lot on the cash flow and viability of the project, instead of the strength and track record of the company.

“Some of the things we look at are the strengths of the project team, who has awarded the contract and the technology it uses. For example, is it a new technology? Since we are all about financing technology, we have to be very clear on the kind of technology we fund. MDV’s credit people take a lot of effort to understand the technology before it comes to us.”

MDV products are typically project-based financing. “We package project financing in many products — contract financing, revolving project line and term loans. The workability of the project determines whether we fund it or not,” says Md Zubir.

Like banks, MDV requires collateral for the financing it provides. But this does not have to be in the form of tangible assets. “The focus is not so much on tangible assets, but on soft collateral, like personal guarantees,” Md Zubir says.

“Personal guarantees are the most important form of ‘collateral’ because we need commitment from the borrowers themselves. Then there are debentures, but sometimes when it comes to start-ups, the debentures are not worth a thing. All in all, we just want to make sure the [stakeholders] are committed to the project.”

While some of MDV’s lending programmes carry more risk than those offered by financial institutions, Md Zubir says it is important that it continues to help companies which otherwise would not be able to receive funding. For example, the Intellectual Property Financing Scheme was introduced by the government to promote innovation and enable companies to put up their intellectual property as collateral in exchange for funding.

“If you want to become a high-income nation, intellectual property plays a very important role because it has high value,” he says. “So, the government accepts some of the risk (50%) through the Credit Guarantee Corporation, while financial institutions such as MDV take the remaining 50%. Normal banks will not touch this.”

MDV, however, is not immune to non-performing loans (NPL). According to Md Zubir, its current NPL rate stands at 15%. “Our gross NPL is currently 15%, but that is not high [for venture capitalists],” he explains.

“Unlike banks, we do not sell our NPLs, even though we can easily do this. Nevertheless, we are targeting it to be below 10% by end-2015.”

Technology companies need to be given time during their gestation period, he says. “If you give technology companies enough time, they will be able to pay their loans and be successful. If you’re going to help small companies, you cannot take too strict a stance, because that defeats the whole purpose.

“The scheme has to be end-to-end, from where you start evaluating up to full recovery [repayment of funds]. However, we will only allow them time after a thorough reassessment of the project timeline and their ability to pay.”

Like other financial institutions, MDV monitors projects and cash flow to ensure that borrowers are able to repay loans. Prior to disbursing funds, it also carries out stringent credit checks to make sure the directors and shareholders have clean backgrounds.

Md Zubir says MDV’s biggest challenge is striking a balance between funding high-risk firms and being able to create successful companies. “These companies are weak, yet their projects are high-risk. So, the challenge is helping them to succeed.

“Being technology companies, the key thing is to make sure the technology is accepted by the marketplace. For example, most of the products of biotechnology companies require a very long gestation period and some effort to make sure that it is FDA-approved.”

The FDA, or the Food and Drug Administration, is a federal agency under the US government’s Department of Health and Human Services.

“Even then, when they compete, they have to compete in the global market, because Malaysia’s is limited,” he adds. “The challenge for companies is that they cannot focus solely on the domestic market. They have to strategise so that they can penetrate the global market. Otherwise, they cannot expand, and it will be difficult for us as well.”

Md Zubir says MDV has not defaulted on any of its loans. “We are making the last payment to JBIC, and we have disbursed more than RM8 billion to more than 600 projects in the country. All these are high-tech projects, yet we are still able to maintain our position as a viable financier in the country.”

In fact, according to him, MDV is one of the few government-linked companies (GLCs) to pay dividends to the government. “We have been [paying dividends to the government] for the last three years,” he says. “How many GLCs do you know pay dividends to the government? That, to me, tells the whole story of how we well we have done.”

Recent debates in Parliament, however, have placed MDV under scrutiny. In late November, the government tabled a parliamentary order paper to convert MDV’s debt of RM400 million to the government into equity. This was instantly interpreted by some quarters as a move to wipe out the debt altogether.

Calling this debt-to-equity conversion a “bailout”, PKR Member of Parliament Rafizi Ramli told Parliament that if MDV was profitable, there would be no problem repaying the debt and the government would not need to perform the conversion. He also said the government would have to service the debt it raised via bonds to lend to MDV in the first place.

In response, MDV issued a statement clarifying that the government’s move was not intended to wipe out debt, but to “strengthen MDV’s equity position in order to balance its current portfolio size and ensure that MDV has sufficient equity to support its future portfolio growth prudently”.

 

This article first appeared in Unlisted & Unlimited, The Edge Malaysia on January 12 - 18 , 2015.