This article first appeared in The Edge Malaysia Weekly on October 31, 2022 - November 6, 2022

Long-term institutional funds always seek risk-free equity market instruments to match their liabilities.

Towards this end, the Social Security Organisation (Socso) has entered into a term sheet agreement with Tanco Holdings Bhd to subscribe for a RM100 million Redeemable Preference Share (RPS) issuance of the company.

The five-year hybrid equity market instrument offers an 8% return per annum and is secured by land, which will be worth 1.67 times the investment amount. There are other conditions attached, such as Tanco not being able to issue new shares beyond the 10% that all companies seek annually and Perkeso having all rights in the collateral in case of a default or dispute.

Tanco’s major shareholder, Datuk Seri Andrew Tan, also gives a personal guarantee to the RPS, which ranks higher than the ordinary shares of Tanco.

Socso would have experienced a net cash outflow in the last 18 months as it had to support employment schemes initiated by the government during the pandemic. One of them was to subsidise the wage bill of companies employing low-paid workers.

Before the pandemic, Socso had about RM30 billion in its kitty. The latest amount is not known. But the fund, which is mainly used to provide payments to disabled workers, always looks out for risk-free investments that give yields of 8% or more.

Whether instruments such as RPS are risk-free will only be known when the equity paper are due for redemption. Such paper issued by top-notch companies are considered less risky.

In the case of Tanco, it is rebuilding its balance sheet following years of restructuring its debts, some of which were tied to the Asia unit of the now defunct Lehman Brothers. As at end-September, its debts stood at RM40.8 million, of which some RM30.5 million will be wiped out from the proceeds of a proposed rights issue.

Tanco’s mainstay is property development and construction. The RPS, which requires shareholders’ approval, will be a good alternative form of funding for the company.

As for Socso, whether the investment strategy pays off will only be known when the paper come due, with the first tranche coming due four years from now.

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