Silk Holdings’ highway divestment hits snag

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SILK HOLDINGS Bhd’s proposed sale of its highway concession to IJM Corp Bhd for RM395 million in cash seems to have hit a snag.

Last Friday, a meeting that was to have been held between Silk Holding’s wholly owned subsidiary, Sistem Lingkaran-Lebuhraya Sdn Bhd (SILK), and bondholders was abruptly cancelled.

The Edge has learnt that the reason given to bondholders for the cancellation was that the company had not received proxy forms.

The extraordinary meeting was to seek approval from Sukuk Mudharabah holders on the divestment of the 37km Silk Highway, linking the northern and southern parts of Kajang.

In an announcement to Bursa Malaysia last Friday, Silk Holdings said the trustee of Sukuk Mudharabah, as chairman of the meeting for the sukuk holders scheduled for Oct 10, had cancelled it.

However, the reason for the cancellation was not revealed in the announcement, with Silk Holdings merely informing the bourse that a notice to convene a new meeting with bondholders would be issued.

According to executives familiar with the matter, CIMB Group Holdings Bhd and Bank Islam Malaysia Bhd (BIMB) had voted against the proposal through proxy forms. Collectively, the duo hold about 47% of the sukuk issued.

CIMB is believed to have RM273.8 million of the bonds, or 36.4% of the total of RM752.2 million in debt paper. The exact amout SILK owes CIMB now is unknown.

SILK requires 75% approval from bondholders to pass the resolution on the sale of the highway at an extraordinary meeting. “In fact, CIMB alone should be sufficient to stop the proposal,” says an executive.

The bondholders are against the proposed divestment because they are concerned that new owner may unfavourably vary the terms of the debt paper.

Furthermore, the timing of the asset sale is just before the bondholders are due to enjoy higher coupon rates of 8%.

The increase in the coupon rate is according the structure of the sukuk  to have lower profit sharing in the initial years of the tenure in order to ease the company’s burden, as it was financially stressed in its initial years.

The Edge had earlier highlighted the brewing problems and reported that the bondholders were demanding in excess of RM350 million cash as compensation upon completion of the sale of the highway concession.

The compensation is basically for the bondholders taking a risk in lending to SILK when it was financially stressed and in dire need of restructuring its borrowings.

Silk Holdings considers the amount demanded as absurd, according to sources familiar with the company. Should the company bow to pressure and pay the amount, it will only be left with RM45 million from the sale.

It is also learnt that Silk Holdings’ top management has been lobbying hard to convince the creditors to approve the asset sale.

The rationale for the divestment is to enable Silk Holdings to unlock the value of its investment in SILK, and to concentrate on growing its oil and gas support services business.

To recap, SILK was awarded a concession in October 1997 to finance, design, construct, operate and maintain the highway for 33 years. The construction of the highway was largely financed by RM2 billion worth of sukuk in 2001. The debt paper was however, downgraded by rating agencies in 2007 as SILK was unable to fulfil the redemption of a RM150 million portion of the sukuk.

The highway did not do well in the early years when it opened to traffic in June 2004. Traffic volume was below forecasts, resulting in low toll revenue and consequently, tight cash flow.

SILK requires 74% approval from bondholders to pass the resolution on the sale of the Silk highway. - Photo by Patrick Goh

Data from the Companies Commission of Malaysia show that SILK is making losses. It posted a net loss of RM16.49 million in the financial year ended July 31, 2013, 16% lower than RM19.62 million a year ago. Revenue stood at RM76.8 million versus RM67.6 million in FY2012.

As at July 31, 2013, SILK had accumulated losses of RM192.13 million, long-term borrowings of RM828.8 million and current liabilities of RM58.17 million.

While other toll road concessions have on the whole been cash cows for their owners, the SILK highway has been a drag on Silk Holdings.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.