This article first appeared in The Edge Malaysia Weekly on January 17, 2022 - January 23, 2022

BOUSTEAD Holdings Bhd perpetual sukuk holders are enjoying a windfall as the profit rate for the paper continues to rise.

By the end of this year, it could step up to as high as 10.6% — more than 700 basis points higher than the prevailing 10-year Malaysian Government Securities’ yield of 3.55%.

To put things into perspective, in 2013, Boustead established a Junior Islamic Medium Term Note Programme of up to RM1.2 billion in nominal value, which entailed the issuance of hybrid equity in the form of perpetual junior sukuk. The perpetual sukuk is accounted as equity on Boustead’s balance sheet, as there is no contractual obligation to redeem the instrument.

The periodic distribution rate of the perpetual sukuk for the first five years since issuance ranges from 6.1% to 6.25% per annum. If the company does not exercise its option to redeem the sukuk at the end of the fifth year, the periodic distribution rate increases 1.5% per annum for the sixth year, and for the seventh year onwards, the periodic distribution rate will be further increased by 1% per annum for every year thereafter, subject to the maximum of 15% per annum.

The perpetual sukuk was issued in seven tranches amounting to RM1.2 billion, of which Boustead exercised its call option to redeem three tranches (Tranches 2, 5 and 6) in 2019, amounting to RM593 million.

A check on Boustead’s balance sheet as at Dec 31, 2020, shows an outstanding sukuk amount of RM607 million, comprising Tranches 1, 3, 4 and 7. According to a source with knowledge of the matter, Lembaga Tabung Haji is the largest holder of Boustead’s perpetual sukuk at RM175 million, followed by Boustead’s parent Lembaga Tabung Angkatan Tentera (LTAT) with RM150 million and Kumpulan Wang Persaraan (Diperbadankan) (KWAP) with RM100 million. It is understood that the tranche in which Tabung Haji and KWAP’s payments are due is expected to have a stepped-up profit rate of 10.6%, while LTAT’s tranche is expected to see a stepped-up rate of 9.6%.

In 2020, profit rates for the perpetual sukuk ranged from 7.75% to 8.6%, and the total amount attributable to holders of the perpetual sukuk amounted to RM50.5 million. Assuming profit rates for the perpetual sukuk are stepped up this year to range between 8.75% and 10.6%, the amount attributable to holders of the sukuk could exceed RM60 million.

In an email response to questions sent by The Edge on the stepped-up rate of the sukuk and the amount due to perpetual sukuk holders this year, a Boustead spokesperson said that “the disclosed information is publicly available, and is generally known by the financial institutions that support the group”.

On whether the group has sufficient resources to finance the obligation, the spokesperson responded that “thus far, the group has successfully managed and met all its obligations under the programme”.

As at Sept 30 last year, Boustead reported cash and cash equivalents of RM758.1 million, with total borrowings amounting to RM7.2 billion, of which almost RM4 billion of its debt is current. Revolving credits made up more than half of its current borrowings.

Last year, The Edge reported — quoting sources — that Boustead has been trying to trim its RM7 billion debt load, and has been in talks with lenders to top up existing loans, refinance existing debt and give it extra time to make payments.

“Sources point to the urgency for Boustead to restructure its debt in order to have a sustainable debt structure going forward. This includes weaning itself off its reliance on short-term general purpose debt such as revolving credit,” the weekly reported then.

In February last year, LTAT cancelled its plans to privatise Boustead due to the challenging environment arising from the Covid-19 pandemic.

Boustead, which has interests in pharmaceuticals, heavy industries, plantations and property, reported a net profit of RM91.5 million against a net loss of RM198.6 million a year earlier for the nine-month period ended Sept 30, 2021 (9MFY2021), while revenue increased 48% to RM8.34 billion. The improvement in revenue and profitability was attributed to a stronger performance from its plantation and pharmaceutical divisions, in particular, and also bolstered by a one-off gain on a disposal of a hotel, Royale Chulan Bukit Bintang.

Compared with a year ago, Boustead shares have declined 16% to close at 56 sen last Friday to give the company a market capitalisation of RM1.13 billion.

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