This article first appeared in Corporate, The Edge Malaysia Weekly, on May 23 - 29, 2016.

DEBT-LADEN flat steel manufacturer Megasteel Sdn Bhd has proposed a debt settlement scheme that may see its unsecured creditors taking up a stake in a special purpose vehicle (SPV), according to court documents obtained by The Edge.

The debt settlement scheme, or scheme of arrangement, is part of Megasteel’s restructuring exercise, which will include the disposal of its assets to the SPV. Some of the assets would be leased to a new company that will invest some RM1 billion in a new blast furnace.

Both the secured and unsecured creditors might have to take a haircut as Megasteel proposes that the creditors waive any and all interest payments, default interest payments, penalties, interest accruing and fees on the outstanding debt. As at Dec 31, 2015, Megasteel owed RM895.7 million to its secured creditors and RM3.28 billion to unsecured creditors. The unsecured creditors include Megasteel’s suppliers, which industry officials say include companies linked to Tan Sri William Cheng Heng Jem.

Cheng is the largest shareholder of both Lion Corp Bhd and Lion Diversified Holdings Bhd. Lion Corp holds a 21% stake in Megasteel through Limpahjaya Sdn Bhd, while the rest is owned by Lion Diversified.

According to the affidavit in support of the originating summons in the matter of the proposed scheme of arrangement and compromise between Megasteel and its creditors, the hot rolled coil producer is seeking an 18-month moratorium on principal repayment of the secured debt.

A bullet payment on principal of RM50 million will then be made at the end of nine months, when the moratorium ends. The balance of the principal will be repaid via 40 equal quarterly instalments over a 10-year period. In return, the secured creditors will get first legal charge over four plots of land owned by Megasteel, first debenture over the lease assets and the floating assets of the SPV, and assignment of the net lease proceeds and designated accounts.

Surplus assets of Megasteel, which are not required for the operation of the new blast furnace, will then be liquidated and disposed of. The basis for distributing the proceeds will be in accordance with general liquidation rules, the affidavit reads.

However, some of the unsecured creditors might have to waive the balance of the unsecured debt. This will be determined after the unsecured debt is waived of any interest, late charges and penalties, partial conversion of the remaining debt into equity in the SPV and all liquidated assets are disposed of.

The debt restructuring is being conducted under the supervision of the Corporate Debt Restructuring Committee (CDRC) of Bank Negara Malaysia. Megasteel has been under CDRC’s purview since Dec 20, 2012.

From this month, Megasteel is required to make monthly reports to the CDRC on the progress of the scheme of arrangement and the blast furnace initiative. 

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