Perwaja creditors looking at big haircuts

-A +A

AILING steelmaker Perwaja Holdings Bhd will seek to extend by three months its Nov 25 deadline to come up with a comprehensive regularisation plan, say sources.

The company will need at least RM300 million of fresh capital to restock raw materials, restart its operation and perhaps complete an iron ore pelletising plant while at the same time getting creditors to take a haircut on some RM2.2 billion of debt, says a source familiar with the plan.

As it could be diffi cult for its current major shareholders Kinsteel Bhd and Maju Group to fork out the money on their own, the scheme could turn to new investors for fresh capital.

“Unless this is done, the steelmaker that was state-owned and started under the Mahathir administration in 1982 could face the prospect of liquidation,” says the source.

Kinsteel, controlled by Tan Sri Pheng Yin Huah, now holds a 37.3% stake in the Bursa Malaysia-listed Perwaja (plus a large number of redeemable convertible unsecured loan stocks that could further raise its equity) while Maju Group owns 31.8%. Controlled by Tan Sri Abu Sahid Mohamed, Maju also holds a 15.82% stake in Kinsteel.

That Perwaja’s steel mill in Kemaman, Terengganu, has not been operating since August last year gives an idea of how dire the situation is. In the meantime, the group has been keeping its 2,000 workers on payroll with a RM450 monthly allowance in case things turn around. But this cannot go on much longer, considering the cash crunch it is facing with current assets down to only RM180.9 million as at June 30 this year compared with current liabilities of RM1.9 billion.

According to sources, Perwaja’s secured lenders are expected to be asked to take a 20% haircut on RM850 million worth of trade financing and Islamic bonds. RHB Bank Bhd is believed to have the highest exposure among the secured lenders, which include Standard Chartered Bank, OCBC Bank and Kuwait Finance House.

The unsecured lenders of the remaining debt or payables are expected to take a 50% haircut. The largest among them is Petroliam Nasional Bhd, which is still owed RM275.77 million for gas supplied, while Tenaga Nasional Bhd needs to be paid RM176.71 million in electricity bills. On top of that, the government has lent Perwaja over RM200.6 million. Other unsecured suppliers are owed about RM245 million.

“The biggest problem for Perwaja has always been that its debt is much higher than its equity. In the steel business, where prices are volatile and margins are thin, you can’t have too much leverage or you will just end up working for the bank,” explains a source with knowledge of the matter.

To save Perwaja, the debt has to be brought down to a more reasonable level and lenders will have to take a haircut, he adds. It doesn’t seem like the lenders have much choice, though.

“If Perwaja goes into liquidation, its assets aren’t going to be worth much in a distressed sale. This is a very specialised industry and a steel mill isn’t something that anyone can just buy. If creditors do not take a haircut, they will only get a few cents for every dollar. The land (its plant in Kemaman) is probably worth about RM200 million while the plant may be worth about RM400 million,” observes the source.

Hence, the 20% haircut for secured lenders, which are mainly the four banks mentioned above, is not the worst-case scenario. These banks have lent some RM740 million to Perwaja.

Then, there is some RM110 million in murabahah medium term notes, which industry players say are mostly held by RHB Bank, which was also the issuer of the notes. While Kinsteel has provided a corporate guarantee for the said Perwaja debts to the tune of RM706 million, calling the guarantee would not help as Kinsteel’s asset base is deemed insufficient to repay the amount.

Inevitably, apart from a 20% haircut, the restructuring could require the banks to convert some 10% of the amount owed into shares and the remaining 70% to be termed out over eight to nine years in order to provide Perwaja with much-needed breathing space in terms of cash flow.

As for the unsecured lenders, the source says, “A 50% haircut may look bad, but the unsecured lenders will lose everything if the assets are liquidated.”

However, it cannot be ignored that the plant cannot run without the support of its suppliers, especially without gas from Petronas and power from Tenaga.

Perhaps more crucial to the restructuring is convincing strategic investors to commit fresh funds to Perwaja. Sources estimate that it would take at least RM300 million to put the steelmaker back on track.

Naturally, the new shareholders will want a say in the running of Perwaja, which means the Peng family will lose management control and at the same time see its current majority shareholding, held through Kinsteel, significantly diluted.

A sizeable portion of the fresh capital would be used to complete an iron ore concentration and palletisation (C&P) plant, which zwould allow Perwaja to process raw iron ore and reduce the raw material costs for its steel mill by an estimated 20% to 30%, says the source. Management has been hoping that the C&P plant, when it is up and running, will be a key contributor to the group until steel prices pick up again.

“Given the current environment, it would be very difficult to get new investors without some support from the government. Subsidy is one way but there will be complaints that it is unfair,” says the source.

Nevertheless, it all boils down to price. Other local players, who are also facing operational difficulties amid current low steel prices, will be interested if the banks are willing to take a big haircut or if the assets are sold via a distressed sale.

“The assets are good. Perwaja just needs a shareholder with deep pockets who can wait for the industry to turn around. Where else can you find a steel mill next to a port? The mill is also using an electric arc furnace, which is much more flexible than a blast furnace that you can’t switch off,” remarks an industry player.

This article first appeared in The Edge Malaysia Weekly, on November 24 - 30, 2014.