This article first appeared in The Edge Financial Daily on May 23, 2019

KUALA LUMPUR: The proposed rights issue at Perdana Petroleum Bhd announced last week is a full-fledged solution for its corporate debt restructuring exercise, said its executive director Bailey Kho.

He said the debt restructuring exercise will help the oil and gas offshore marine services group in its turnaround journey concurrent with its improved outlook this year.

Under the exercise, Perdana’s 60.48% shareholder Dayang Enterprise Holdings Bhd will advance RM365 million to Perdana, to clear Perdana’s borrowings that it has guaranteed.

With the latest advances, Perdana will owe Dayang RM645.66 million. Perdana will then undertake a rights issue of redeemable convertible preference shares (RCPS) for RM506 million, of which RM455 million worth of the RCPS will be issued to Dayang to pare off its debt to the major shareholder.

“On Perdana, there will be interest savings of RM455 million times 6%; [that is] otherwise too heavy for Perdana for a turnaround,” Kho told reporters after the group’s annual general meeting on Tuesday.

Commenting on the rationale of issuing RCPS to pare its debt, Kho said: “If you do a restructuring without converting debt into equity, it is still a debt.”

“Like it or not, [even if it owes] to Dayang, Dayang still has to charge interest to Perdana. Where does that leave Perdana? The restructuring is not seen as a positive restructuring.

“With RCPS, you are not jeopardising the public spread. RCPS is a better option, so we can stagger the conversion of that equity,” Kho said.

Recall that the proposed RCPS will have a 10-year tenure and will be convertible into Perdana shares on a one-for-one basis.

“Of course [future] dilution [will be] there; it is a trade-off to [reduce] interest charges,” added Kho.

The exercise will leave Perdana with RM190.66 million owed to Dayang.

Separately, Perdana also has some RM178.25 million in borrowings from four lenders, which Kho said will be given term-out of between two and seven years as part of its debt restructuring exercise.

Perdana, said Kho, has been fortunate to have Dayang to provide advances previously.

But he acknowledged that the process has been a drag to Dayang. “Dayang needed to advance money to Perdana, like it or not. So why not Dayang take over the debt in a responsible manner in exchange for the RCPS?”

Dayang’s crucial sukuk arranged

Perdana’s payment of borrowing to its lenders using advances from Dayang hinges on the success of Dayang’s own proposed sukuk programme.

The latest RM365 million advances from Dayang to Perdana will be funded via Dayang’s proposed issuance of sukuk worth up to RM682.5 million. A balance of RM317.5 million from the sukuk will be used to pare off Dayang’s own debt.

While details were scarce, Kho, who is also Dayang’s group financial controller, said Dayang has appointed lead arrangers for the sukuk.

“[They are] essentially the two banks that were supportive of Perdana [then], UOB (United Overseas Bank [Malaysia] Bhd) and Danajamin [Nasional Bhd],” said Kho.

Also participating in the sukuk is Malayan Banking Bhd, which will convert its existing loan to Dayang into the new sukuk, added Kho.

Discount ‘fair’ to Dayang shareholders

Prior to that, Dayang also proposed a one-for-10 rights issue of its shares amounting to 96.48 million shares — which will be undertaken by its major shareholders owning 51.59% of the company.

“We are doing the rights issue because it is one of the requirements by the lenders [under its debt restructuring programme] for Dayang to raise money from major shareholders,” said Kho.

They are 26.42% shareholder Naim Holdings Bhd, Datuk Ling Suk Kiong and family (18.24%), and Tengku Datuk Yusof Tengku Ahmad Shahruddin (6.93%). “The fund will be raised; it is a done deal,” said Kho, with Kenanga Investment Bank underwriting the remaining rights issue.

At an illustrative issue price of 80 sen, the rights issue will raise some RM77.18 million, of which RM70 million will be used to pare debt as well.

It is worth pointing out that the illustrative price of Dayang’s rights issue is at a 29% discount to its closing price of RM1.13 on Tuesday. Similarly, Perdana’s rights RCPS issue price will entail a discount of up to 30% of Perdana’s share price “to be fair to Dayang shareholders”, said Kho.

This compares with a concurrent private placement by Dayang of up to 10% of its share base or around 96.48 million shares to third-party investors, which has an illustrative placement price of RM1.14 per placement share.

With an early estimation of raising RM109.99 million at an illustrative price of RM1.14 per placement share, Dayang expects to use RM75 million as a sinking fund for the sukuk programme, RM15 million for capital expenditure (capex) and RM17.5 million for working capital.

Better outlook for 2019

The sukuk and the rights issue will help Dayang pare some RM387.5 million worth of debt.

“You will see that the group’s debt will [be] reduced, not increased, with the new sukuk,” commented Kho. “Group debt at Dayang will [be] reduced from around RM1 billion to around RM600 million. There will be interest saving.”

Meanwhile, the balance RM51 million from Perdana’s RCPS issuance will come from minority shareholders, to be used mainly for Perdana’s working capital.

With an order book of over RM220 million and a tender book of RM240 million, the group is looking positively towards better charter and utilisation rates this year, said Kho.

Perdana’s first quarter ended March 31, 2019 (1QFY19) — typically the least performing quarter of the year — saw the charter rate rise 10% year-on-year, he said, with an utilisation rate of its 16 vessels at around 36%, up 9% from 27% a year earlier.

“Going into the second quarter, it looks much better,” Kho said. “Right now, 15 out of 16 [Perdana] vessels [are] chartered, and we are also chartering third-party foreign vessels [as Perdana has the necessary licences].”

Perdana’s next course of action is to make do with its existing assets. “Perdana is in consolidation mode … [it] will only make the necessary capex for the vessels’ statutory mandatory dry-docking.

“[But] you can say that [the worst is over pending the debt restructuring]. We are happy to maintain that stand,” added Kho.

Perdana also announced on Tuesday that 1QFY19 losses narrowed to RM32.94 million, from RM66.66 million a year ago, thanks partly to the higher utilisation rate of its vessels. It was also due to a foreign exchange gain of RM1.1 million during the quarter, from a loss of RM28.5 million previously.

The higher utilisation rate also helped Perdana’s revenue rise 53.2% to RM25.7 million from RM16.78 million in 1QFY18.

“We believe 2019 will be an inflection point for Perdana to turn around its business after weathering various challenges over the past few years. We believe that our streamlined operations and the synergistic collaboration with [the] Dayang group will help us to emerge stronger going forward,” the group said in a filing with Bursa Malaysia.

Perdana shares fell 3.5 sen or 10.1% to close at 31 sen on Tuesday, giving the group a market capitalisation of RM241.33 million.