BONDHOLDERS of Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd (SILK), a wholly-owned subsidiary of SILK Holdings Bhd, are seeking in excess of RM350 million in cash from the proposed sale of the highway to IJM Corp Bhd, sources say.

The Edge understands that a meeting between the bondholders and SILK Holdings’ officials has been scheduled for the second week of next month, where the proposals will be discussed.

The bondholders, who were owed RM863.6 million (including ijarah rent) as at end-July 2013, seem to be arm-twisting SILK Holdings considering the price tag for SILK is slightly less than RM1.3 billion, of which only RM395 million is in cash. SILK is the concession holder for the 37km SILK Highway linking the northern and southern parts of Kajang.

“Seems like an absurd price (RM350 million) they (the bondholders) are asking for SILK. The company will be left with only RM45 million after the sale, after all the hardships in the last few years … But it’s all strategy at the end of the day,” a source says.

On the flip side, the bondholders have taken a big risk in lending to SILK Holdings when it was on the verge of bankruptcy.

Sources say the bondholders are led by CIMB Group Holdings Bhd. CIMB’s subsidiaries are the largest bondholders in SILK, followed by Malayan Banking Bhd’s Etiqa Takaful Bhd.

According to documents viewed by The Edge, CIMB in October 2007 — at the time the bonds were issued — had RM273.8 million of the bonds or 36.4% of the RM752.2 million in debt papers. It is not clear how much is held by CIMB now.    

It would seem that CIMB, acting for all the bondholders, is angling for SILK Holdings to buy back the debt papers at what could be a high premium. 

Other than approvals from SILK Holdings’ shareholders and government bodies such as the Economic Planning Unit, a nod from the bondholders is also a must. Also, SILK Holdings must be released from its obligations under the corporate guarantee given to Affin Investment Bank Bhd, the principal adviser and lead arranger of the debt papers.

This could leave SILK Holdings in a quandary. 

The debt papers have a coupon rate of as high as 8%, and there are several terms that involve special purpose vehicle Manfaat Tetap Sdn Bhd (the wholly-owned subsidiary of SILK that issued the bonds). 

To recap, SILK was awarded the concession in October 1997, to finance, design, construct, operate and maintain the highway for 33 years. 

However, through a supplemental agreement in August 2001, the concession period was extended to July 31, 2037.

In a nutshell, the highway has not done well since it started operations in June 2004. 

SILK Holdings was initially known as Sunway Infrastructure Bhd and was listed in end-2003. However, the Sunway group, helmed by Tan Sri Jeffrey Cheah, ceased to be a substantial shareholder in May 2008.

Cheah exited, selling the stake to a group led by current executive chairman Datuk Azlan Hashim, who changed the company’s name and who now holds 19.6% equity interest in the company, largely via his vehicle Infra Bumitek Sdn Bhd.

His partner in Infra Bumitek is Johan Zainuddin Dzulkifli, a non-executive director of SILK Holdings. Johan, via direct and indirect stakes, holds 33.5% equity interest in the company. 

Two other substantial shareholders are Abdul Rahman Ali and Mohd Noor Ismardi Idris. Abdul Rahman, via Temurus Jaya Sdn Bhd, has a 21.7% stake while Mohd Noor Ismardi has 7.4% equity interest.

The construction of the highway was largely financed by RM2 billion worth of Islamic bonds in 2001. These debt papers were downgraded by rating agencies in 2007 as SILK was unable to fulfil the redemption of a RM150 million portion of the debt papers. 

This came about because of low traffic volumes. Weak traffic volumes resulted in low revenue, which in turn required a debt restructuring exercise which seemed to favour the bondholders due to the risks involved. The coupon rate increased towards the later part of the bond tenure on the basis that traffic volume would increase in time. 

The highway has weighed down SILK Holdings.

Apart from the highway, SILK Holdings’ main asset is a 70% stake in Jasa Marine (M) Sdn Bhd. 

For the nine months ended April 30, 2014, SILK Holdings registered a net profit of only RM8.7 million on the back of RM267.1 million in sales. Earnings per share for the period was 1.9 sen. 

According to SILK Holdings’ explanatory notes, its highway division suffered a loss before tax of RM7.3 million on revenue of RM64.6 million for the nine-month period.

“Although the highway division will continue to record accounting losses due to the existing high finance and amortisation costs, it is expected to remain cash flow positive on an operational basis as a result of the restructuring of the long-term debt whereby the sukuk mudharabah obligation payments until Jan 25, 2015, will be limited to the available cash flow generated [from the highway],” SILK Holdings says in notes accompanying its financials.  

A check on the company’s income statement reveals that SILK Holdings paid almost RM88.4 million in finance costs for the nine months.  

As at April 30, 2014, the company had cash of RM99.3 million and total debt of RM1.64 billion. 

A source close to IJM says, “IJM is not hard up for the asset … if it comes, it comes. Not many companies other than IJM, maybe Gamuda Bhd, have the balance sheet to take the highway, so the pressure is on SILK [Holdings], not IJM,” he says.

IJM has three highways connecting to the SILK Highway, namely the Besraya Highway, the Kajang-Seremban Highway and the New Pantai Expressway. Therefore, the acquisition could enhance economies of scale for IJM. 

This article first appeared in The Edge Malaysia Weekly, on September 29 - October 5, 2014.

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