This article first appeared in The Edge Financial Daily, on June 7, 2016.

Kuala Lumpur: Minister of Finance Inc (MoF Inc) will pump RM1.25 billion into Proton Holdings Bhd by subscribing to 1.25 billion units of new redeemable convertible cumulative preference shares (RCCPS) issued by the beleaguered automaker to raise RM1.25 billion cash.

The amount that MoF Inc injects into Proton is indeed the conditional soft loan, which International Trade and Industry Minister Datuk Seri Mustapa Mohamed announced shortly after former prime minister Tun Dr Mahathir Mohamad relinquished his position as the chairman of Proton.

“[The] Proton group plays a crucial role in the national automotive industry where there are about 12,000 workers directly under the group, while approximately 50,000 are employed under the various vendor companies. In cognisance of this, the government agreed to subscribe to Proton’s RCCPS to provide financial support to Proton.

“This will also help rebuild the vendors and suppliers’ confidence in Proton,” said DRB-Hicom Bhd, which wholly owns the national carmaker, in the announcement to Bursa Malaysia.

The financial aid comes barely four years after DRB-Hicom Bhd paid Khazanah Nasional Bhd, the investment arm of MoF Inc, RM1.29 billion cash to acquire the latter’s 43% stake in Proton to take the auto manufacturer private.

According to the announcement to Bursa, Proton will issue RCCPS to Govco Holdings Bhd, which is 99.99% owned by MoF Inc by way of cash payment.

The RCCPS have a par value of one sen each and premium of 99 sen each at an issue price of RM1 each. The preference shares have a dividend of 4% per annum on a cumulative basis. The conversion ratio is at one unit of Proton’s RCCPS to 1.152 units of Proton’s shares. The tenure for the RCCPS is up to 15 years after the issuance date.

Should MoF Inc convert 1.25 billion of Proton’s RCCPS and unpaid dividend declared for Proton’s RCCPS of RM574 million into 2.1 billion new Proton’s shares, DRB-Hicom’s holdings will be diluted from 100% to about 20.72%, while Govco will hold approximately 79.28% in Proton.

The subscription of RCCPS is conditional on Proton relocating its manufacturing plant from Shah Alam to Tanjung Malim, said DRB-Hicom in the announcement.

Meanwhile, Proton needs to present a restructuring plan to the committee led by the Performance Management and Delivery Unit consisting of members appointed by the government, who will be responsible for monitoring the implementation of the plan.

Besides, Proton is required to seek a strategic and renowned partner, who will assist in research and development to become a competitive player in the automotive industry at the international level within one year from the subscription agreement.

DRB-Hicom explained that the proposed issue of RCCPS will enable Proton to regularise its cash flow and settle the long outstanding balances payable to the carmaker’s various local and international creditors, vendors and suppliers.

DRB-Hicom noted that Proton had been experiencing flagging vehicle sales in recent years and this had affected its cash flow.