This article first appeared in The Edge Malaysia Weekly on November 22, 2021 - November 28, 2021

KNM Group Bhd’s non-payment of its THB2.78 billion (RM352.57 million) bonds may change the future direction of the engineering group, with its new largest shareholder MAA Group Bhd now seeking to play a bigger role in its turnaround.

The non-payment event came just weeks after MAA’s controlling shareholder Tunku Datuk Yaacob Khyra came in as a non-executive director in KNM on Nov 1.

When contacted by The Edge, Yaacob, who previously suggested the possibility of renegotiating or refinancing the Thai bonds, said he was briefed about the non-payment event at his first KNM board meeting.

“I was quite disappointed that [the company] did not manage the non-payment event. In my mind, there would have been a solution [to address the maturing debt],” Yaacob said.

“Because of this event of non-payment, it’s time for MAA to take a more serious role in the operations of KNM. We will be strengthening our role in the company … We are in it for the long haul.”

MAA emerged as a substantial shareholder in KNM in September, and gradually raised its stake to 10.35% to become the largest shareholder ahead of retired KNM founder Lee Swee Eng, with 7.85%.

MAA has two representatives on KNM’s nine-member board. With a stake of more than 10%, a possible scenario would see MAA calling for an extraordinary general meeting to have more board representation to facilitate changes in the company.

When announcing the non-payment on Nov 18, KNM cited challenges arising from the Covid-19 pandemic and the unfavourable operating conditions of its subsidiary Impress Ethanol Co Ltd (IECL), which operates an ethanol plant in Thailand.

The company has a grace period until Dec 2 to pay the principal sum, and until Dec 9 to pay the coupon before an event of default occurs. It said it was in advanced stages to secure new financing, but warned that it may happen only after the maturity date of the bonds.

To avoid a default, Yaacob is hopeful that KNM’s management can negotiate with the bonds’ guarantor Credit Guarantee and Investment Facility (CGIF), a trust fund managed by the Asian Development Bank.

“I am hopeful that CGIF will not call in the event of a default and will provide an extension [for the redemption of the bonds] — but that’s for the management to negotiate,” he said.

“If CGIF calls it an event of default, it may trigger all the other banks to cross default,” says Yaacob.

However, he is of the view that the principal lenders may prefer to keep KNM operating as an ongoing concern. “There is risk but the impact may not be severe,” he adds.

While highly geared, KNM is seen as a company with good assets and subsidiaries, including its main income generators German-based Borsig GmbH and Italy-based heat exchanger supplier FBM Hudson Italiana SpA.

Still, Yaacob is not fond of the idea of selling off profitable assets to meet debt obligations.

Aside from the underperforming Thai ethanol plant, KNM has a UK waste-to-energy project worth an estimated RM350 million. The company also has fabrication yards in Malaysia serving oil and gas companies.

It will take time, however, for the assets to churn out enough returns or to be monetised to reduce KNM’s debt level, between which the company may still need further recapitalisation.

At end-June, KNM had short- and long-term borrowings of RM711.86 million and RM623.48 million respectively, against cash of RM256.47 million. Current liabilities exceeded current assets by RM235.22 million. Negative reserves stood at RM197.58 million, up from RM177.16 million as at end-2020.

For the six-month period ended June 30, 2021 (1HFY2021), KNM’s net profit fell 72.84% to RM8.55 million, or 0.29 sen per share, from RM31.48 million, or 1.2 sen per share, as revenue fell 28.73% to RM477.21 million, from RM669.59 million.

The company has yet to announce its financial results for the 3QFY2021 ended Sept 30, 2021. From its one-year high of 31.5 sen on Sept 7 soon after MAA’s emergence as shareholder, KNM’s share price has retreated to 17 sen on Nov 19, giving the group a market capitalisation of RM568.34 million.

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