1MALAYSIA DEVELOPMENT BHD’S (1MDB) plan to move ahead with an initial public offering (IPO) of its energy arm, Edra Global Energy Bhd, faces headwinds as some local banks are unhappy about being asked to waive their right to the listing proceeds, sources say.

1MDB still has about RM3.5 billion debt remaining out of a RM5.5 billion loan it took last May from a consortium of five banks — Malayan Banking Bhd, RHB Capital Bhd,

Alliance Investment Bank Bhd, Malaysia Building Society Bhd and HwangDBS Investment Bank Bhd (now part of Affin Holdings Bhd).

According to a source, the consent of the five banks is needed for Edra to be listed.

“They’ve been asking the banks for consent for the listing, but one or two banks are resistant (to this) because they want the entire listing proceeds to go toward debt repayment to the banks. Edra, however, wants the banks to waive their rights to the proceeds. That’s the contentious issue,” the source tells The Edge.

The source explains that the parties had previously agreed that the RM3.5 billion debt would be converted into a 10-year term loan or paid in a lump sum through an IPO of the energy assets, whichever came earlier.

“Since the IPO is coming out first, some of the banks feel the entire listing proceeds should be utilised to repay the loan to the five lenders. Not all the banks may feel the same way, however,” the source adds.

It is noteworthy that Maybank — one of the lenders — is the adviser for Edra’s listing exercise, together with Deutsche Bank. Maybank has an estimated exposure of RM1 billion to 1MDB, according to sources.

It is understood that Edra has yet to submit a fresh application for a listing on Bursa Malaysia.

Under 1MDB’s original plan, based on an old draft prospectus viewed by The Edge, the listing exercise would involve the offer for sale of shares held by 1MDB in Edra, while Edra itself was also to have issued new shares. Edra was expected to raise at least RM5.987 billion under a minimum scenario and RM7.026 billion under a maximum scenario.

After deducting the listing expenses, Edra was to have net proceeds of at least RM5.831 billion, of which RM3 billion would go toward the repayment of borrowings, and the remainder used as capital expenditure.

While the original listing exercise was already a tall order, the new submission is expected to be even more daunting, with some of the banks insisting on the settlement of the RM3.5 billion loan.

This is because 1MDB is expected to list a much leaner Edra. The group is reportedly in talks with Tenaga Nasional Bhd, to dispose of its 70% stake in the 2,000mw coal-fired power plant project known as Project 3B or Jimah East. The project would have cost RM11 billion, and had been the most visible catalyst in the pipeline for 1MDB to boost Edra’s listing valuations.

However, extensive delays in the project and inability to secure financing have reduced the value of the project. In fact, industry executives say that Project 3B would have been value destructive to include in the IPO at this stage, hence the planned disposal to Tenaga.

Beyond that, Edra’s listing will also have to cope with unfavourable market conditions and concerns over the whopping debts of its parent, 1MDB, over the past few months.

“To go for listing, you need to have a positive story to tell. You can’t be bogged down trying to fend off negative stories. Withdrawing an IPO submission will also weigh heavily on the listing. In fact, most companies would find it very tough to resubmit an application for listing so soon after it withdraws it,” explains one corporate executive.

He points to Ranhill Energy and Resources Bhd’s failed listing attempt on Bursa Malaysia last year as an example. After the listing was aborted the first time, Ranhill opted to list through the reverse takeover route.

Market conditions have not been favourable, which has resulted in some companies opting to delay their listing, in hopes that they will be able to command better valuations later.

Malakoff, for example, has had to revise its listing expectations. The group is currently looking to list at about RM1.80 a share, which will raise about RM2.74 billion. In comparison, the group was said to have an original target listing price of RM2 per share, which would have raised at least RM3 billion, says one industry source.

Against this backdrop, 1MDB, which has RM42 billion in debt, is also under pressure to raise as much cash as possible from the listing of Edra. This could be one reason 1MDB is trying to negotiate with the five banks to waive their rights to cash out of the RM3.5 billion loan via proceeds from the IPO.

Keep in mind that Edra will want to retain some cash for capex purposes so that it can grow after the listing. The group cannot afford to lose another power project the same way it lost Project 3B. The group last year was awarded on a direct basis the so-called “Project 4B” for a 2,000mw combined cycle gas turbine (CCGT) power plant due in 2021.

“When you do a power project, you need to inject some equity into it. You can’t build it on debt alone or you will just end up working for the bank. Edra will need some capital to kick-start any major power project,” says one industry veteran.

Since Project 4B wasn’t won on a competitive tender, the returns could be better. Due to current power shortages, the delivery date for the power plant project could also be brought forward, something that Edra might even be lobbying for, say industry sources.

Notably, Edra’s road to listing has been a bumpy ride. The energy unit was originally slated for listing last year, but has since been delayed several times until its inadvertent withdrawal of submission. In the meantime, 1MDB had been actively exploring other alternatives, including an outright sale of Edra.

 The Ministry of Finance (MoF), which owns 1MDB, appointed CIMB Group Holdings Bhd on March 26 to act as MoF’s adviser for the potential sale of Edra to strategic investors. CIMB was mandated to identify potential buyers and run a competitive process for Edra.

However, following the government’s approval to extend a RM950 million credit facility to 1MDB last month, MoF last Wednesday announced that it was scrapping its idea of selling Edra’s power plants and would instead proceed with the listing of its energy assets on Bursa Malaysia. As such, it dropped CIMB as its adviser.

Coming back to the RM3.5 billion, it remains to be seen if the banks will give in to 1MDB’s demands. If they don’t, it would add even more pressure on the already tenuous listing.

Recall that the RM3.5 billion loan stems from the refinancing of the RM6.17 billion bridging loan that 1MDB took to acquire T Ananda Krishnan’s power assets — now known as Powertek Investment Holdings Sdn Bhd (PIH) — in 2012.

The bridging loan was supposed to tide 1MDB over until it could list the power assets.

However, due to delays, the RM6.17 billion loan was refinanced into the RM3.5 billion 10-year term loan and another RM2 billion bridging loan that was due in end-November last year.

The RM3.5 billion had been secured against PIH while the RM2 billion had been guaranteed by Ananda himself. Following three one-month extensions to settle the RM2 billion loan, a group of private investors came to the rescue. 1MDB only managed to settle the loan after obtaining a RM2 billion loan from private investors that was arranged by Ananda-controlled Tanjong Public Ltd Co.

However, it is not clear what the new loan is secured against, and what claims these private investors might have against Edra’s assets.

Looking ahead, the fact that the RM3.5 billion is secured against PIH should give the banks a lot of bargaining power. PIH holds the bulk of Edra’s power assets — 3,973mw net generating capacity or 71% of Edra’s 5,594mw net generating capacity.

While Edra’s listing looks to be a daunting task, Maybank, as the lead arranger for the IPO, will also be working very hard to ensure it succeeds. After all, the bank has loan exposure to 1MDB, which could be  a big incentive.

This article first appeared in The Edge Malaysia Weekly, on April 6 - 12, 2015.

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