AGAINST the monsoon grey skies of the East Coast stands the unmistakable silhouette of Perwaja Holdings Bhd’s steel mill, which towers over the surrounding factories in Kemaman, Terenganu. It was here that former prime minister Tun Dr Mahathir Mohamad forged the nation’s first steps into heavy industries three decades ago.

“Most industrialised countries have a steel industry. It’s very important, that’s why we went into Perwaja,” Mahathir tells The Edge in an earlier interview.

“Unfortunately, our ability to manage Perwaja was not there and we made several mistakes. Among the mistakes we made was to set up a plant in Gurun [Kedah] to produce steel bars and things like that,” he admits.

Perwaja’s high quality steel was supposed to kick-start the country’s automotive and construction industries by reducing our reliance on imports. For a while at least, the vision did seem to gain traction, with Perwaja producing almost 1.5 million tonnes of steel annually — more than any other local steel maker — at its peak.

But today,  the steel mill lies quiet. There is no smoke and there is no fire. The massive blast furnaces at the heart of the plant that used to churn out steel by the thousands of tonnes have been cold for over 17 months. Only a skeleton crew remains to keep watch over the plant, while the group’s remaining 2,000-strong workforce has been kept on the payroll with a RM450 monthly allowance.

“It is so sad. When times were good, the monthly salary of a Perwaja worker could go as high as RM3,000, which is considered a good pay for rural folks like us. You could see smoke and steam emitted from the factory during the day time. At night, you could see some beautiful lights surrounding the plant. From far away, people would recognise that this was the Perwaja plant,” says one makcik who runs a roadside stall around the corner as she recalls Perwaja’s  heyday.

Perwaja’s managing director Tan Sri Pheng Yin Huah is probably feeling equally nostalgic. In 2006, he acquired a 51% stake in Perwaja through Kinsteel Bhd around the peak of the steel cycle, and enjoyed a profitable run through to 2008 on high steel prices.

Perwaja was a huge stepping stone for Pheng, since Kinsteel was only a fraction of its size at the time. By the time Perwaja listed in 2008, it had propelled Pheng to new heights in the industry and the business community. He was made a Tan Sri and appointed president of the Federation of Chinese Associations Malaysia, also known as Hua Zong.

But just as Perwaja lifted Pheng’s fortunes, it would also prove to be his unmaking.

As the commodities party came to an end post-global financial crisis, Perwaja — facing a global oversupply of steel — had to borrow increasing amounts of money to keep operations going. As at September 2014, its debts had ballooned to RM2.2 billion.

In fact, in August 2013, the Kemaman plant was forced to shut down after gas supply was cut off by Petroliam Nasional Bhd, and energy supply by Tenaga Nasional Bhd, when the steel maker could not pay its energy bills.

Shutting down the plant was probably for the best in the short term, since Perwaja made a loss of RM1.21 billion in the 18 months ended June 2014 (reported such due to achange in its financial year end).

Even without the massive overheads, Perwaja’s cash in hand had dwindled to a mere RM7.53 million as at September from RM12.18 million a year ago. Things have got so bad that the Employees Provident Fund is taking action against Perwaja for defaulting on RM9.17 million worth of employee contributions.

In September 2013, Kinsteel and Perwaja applied to the Corporate Debt Restructuring Committee, seeking help to mediate between the group and its lenders and to allow it to restructure its liabilities. On Sept 26, CDRC approved the application.

“Despite all the challenges, I think Perwaja can be profitable. It has been profitable before. First, it needs to trim its debts that have grown far beyond what the business can even sustain. Secondly, it is going to need a fresh injection of capital to get the ball rolling again,” explains one industry veteran.

As previously reported in The Edge, the proposed scheme to restructure Perwaja will see secured creditors take a 20% haircut on some RM850 million of debt while unsecured creditors will take a 50% haircut.

The secured creditors include RHB Bank Bhd as well as Standard Chartered Bank, OCBC Bank and Kuwait Finance House.

Meanwhile, unsecured lenders include Petronas, which is still owed some RM275.77 million for gas supplies; Tenaga, which is owed RM176.71 million in unpaid electricity bills; and the Malaysian government, which gave RM200.6 million in soft loans.  Other unsecured suppliers are owed approximately RM245 million.

According to sources familiar with the restructuring, most of the creditors have agreed in principle to these terms. That isn’t surprising considering the alternative — a liquidation of assets. A sale of distressed assets is likely to only recover about RM600 million in total — about RM200 million for the land and RM400 million for the plant. This is because the assets are highly specialised and there aren’t that many buyers.

Meanwhile, the Pheng family, which now has a 31.68% stake in Perwaja via Kinsteel, may have to come to terms with losing management control of Perwaja in the restructuring exercise.  Just before Christmas, Kinsteel for the first time since Perwaja’s listing, sold a 5.66% stake, bringing its stake to 31.68% from 37.34% previously. The 31.7 million shares were transacted between 5 sen and 5.5 sen apiece.

Sources say Perwaja will need a new strategic investor to come in and inject around RM300 million for the restructuring to work, via a private placement followed by a rights issue, but done in such a way that the new shareholder does not cross the 33%  trigger for a mandatory general offer.

“Unless Kinsteel can subscribe to the rights issue, it will see its position diluted substantially to the point they may not be the largest shareholder. The strategic investor is also likely to demand management control as a condition of injecting the capital,” notes a source.

Currently, most of the interested parties are foreign players that are already in the steel business, notes the source. However, many local players have expressed interest in the plant if Perwaja goes into liquidation.

On one hand, this is encouraging as it shows the confidence of local players in the value of Perwaja’s plant that is strategically located close to a port. However, it also shows that many will not touch the company while it is burdened by debts.

The Pheng family’s only hope to maintain control of Perwaja would be for a friendly “white knight”  investor to bid for the stake in the company, as it seems unlikely that Kinsteel would be able to subscribe for the rights issue.

But this would still be better than a default where the Phengs might lose everything since Kinsteel has an estimated RM986 million liability exposure to Perwaja. This comes in the form of RM706 million corporate guarantees and RM280 million in redeemable convertible loan stocks.

Kinsteel has been lossmaking since FY2010 and as at Sept 30, 2014, had net gearing of 11.8 times.

Looking ahead, Perwaja’s most immediate hurdle is convincing Bursa Malaysia of the feasibility of its regularisation plan. The group was supposed to submit the plan earlier this month, but has since applied for an extension. If Bursa rejects the plan, it would set Perwaja on the long painful road of liquidation.

It would also end hopes of restarting the plant anytime soon, leaving the group’s 2,000 employees potentially out of a job.

“Back in the day, many parents would prefer their daughters to marry a Perwaja employee. They were the hottest targets of the matchmakers. It was a dream job in Kemaman,” remarks the makcik.

But with no visibility on the plant starting up again, many have begun seeking work elsewhere in nearby factories or returned to the sea as fishermen.

Some have even been recruited to work at a nearby integrated steel mill that is expected to start production in March 2015. The RM1.8 billion plant is owned by Eastern Steel Sdn Bhd, a joint-venture company between steel pipe manufacturer Hiap Teck Venture Bhd and Shougang Group of China.

Hence, the restructuring will have to be carried our swiftly if Perwaja wants to retain its skilled workforce.

Still, it remains to be seen if Perwaja can be brought back to the black under the new management. After all, it still needs to contend with the flood of cheap steel from China that the government has yet to staunch.

Defending his legacy, Mahathir says: “It [steel] is a good industry, the problem now is that you cannot compete with China. China produces steel at a very low cost, and they can dump. What they don’t need, they send to Malaysia at a very low price. No steel industry, not Perwaja, not Lion, can compete with China … we need protection ... everybody protects, but we seem to be very shy about protecting, thinking that it’s not right to protect. We should protect our [steel] industry, it’s our own.”

This article first appeared in The Edge Malaysia Weekly, on December 29, 2014 - January 04, 2015.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.