Monday, 17 Jan 2011

KUALA LUMPUR: The Minister of Finance Incorporated’s (MoF) 99.99%-owned subsidiary Pembinaan BLT Sdn Bhd (PBLT) is going to the market to raise RM10 billion sukuk in several tranches to finance its development and financing costs, operating expenses as well as to refinance its short-term borrowings.

The first tranche of a RM1 billion sukuk will be issued by the first quarter (1Q) of this year while the book building exercise will begin next week. PBLT will establish a 25-year Islamic Medium Term Notes (IMTNs) programme through its wholly owned subsidiary Aman Sukuk Bhd. The sukuk, which is not government guaranteed, has been given AAA rating by Malaysian Rating Corporation Bhd (MARC).

PBLT, which was incorporated in 2005, was set up to build police quarters, police stations and training ground nationwide for the Royal Malaysian Police.

The large RM10 billion bond issue initially set off some alarm bells, especially in light of the recent Port Klang Free Zone (PKFZ) and the Tuna Port scandals. But there are key differences here.

The PKFZ scandal involved the raising of RM4.6 billion while the Tuna Port project in Penang saw RM80 million drawn-down by the time the project was abandoned.

For PKFZ, its main contractor Kuala Dimensi Sdn Bhd (KDSB) raised bonds in four separate tranches from the market on behalf of Port Klang Authority (PKA).

The money raised was used to finance the ongoing projects including the purchase of land. The payments to bondholders were assigned to PKA. There were also four letters of guarantee/support signed by two transport ministers. The status of these letters is now in dispute.

In the case of Malaysian International Tuna Port Sdn Bhd, which was 40%-owned by the Fisheries Development Authority (LKIM), it raised RM240 million but only RM80 million was drawn-down. There was also a letter of endorsement from the Agriculture and Agro-based Industry Ministry.

PBLT on the other hand was incorporated in 2005, as the government’s response to the Report of The Royal Commission to Enhance the Operation and Management of The Royal Malaysian Police. The Royal Commission had identified unsatisfactory housing and work premises as one of the major challenges that the police force faced.

PBLT has 74 development projects nationwide with an estimated RM9 billion in terms of development, financing and operating costs. To-date the company has completed 22 projects with another 10 projects, amounting to RM2.03 billion partially completed. There are 52 more projects to be completed in various stages from now until 2014. All projects have been awarded to Class A bumiputera contractors.

As to concerns whether PBLT would head the same way as the two other projects, there are several distinguishing factors that are in PBLT’s favour.

One is that PBLT is only going to the market to raise money based on the completed projects. For now, it could only raise RM2 billion and would likely be able to raise another RM3 billion at the end of the year when more projects are completed.Hence there is the reduction of risks of going to the marketplace for projects that have yet to be completed.

“The proceeds will be used to finance our projects and also reduce our borrowings,” said PBLT managing director/CEO Mohammed Redza Mohd Yusof, who is confident that the sukuk will be well received because it was underpinned by completed projects.

There is a borrowing of RM5 billion in a fixed-rate term loan from the Employees’ Providence Fund (EPF) which is due for repayment in 2012.

Mohammed Redza said investors would be investing in something that is completed hence there is no or minimal construction risks.

“It is an almost risk-free bond and the strength lies in the government payment of rental, and the projects are already completed,” he said, adding that the projects are on schedule.

He added while the company’s main purpose was to build the 74 projects for the police, he is not discounting more projects in the future as the force has many more facilities that needs rejuvenation.

On the issue that the funds are being raised via PBLT so that they would be off-budget, Prokhas Sdn Bhd managing director Fazlur Rahman Ebrahim explained that it would be spread out over a few years.

“It means that the government is leasing from us and paying the lease,” said Fazlur. ProKhas is the advisor to PBLT on the sukuk exercise.

When asked on the risk factor for the sukuk, Fazlur said there was no risk in the completed projects as they were handed over to the government, who in turn pays the lease.

“The uncompleted projects are being financed by bridging finance and the EPF. The sukuk is because we want to capitalise on the lowest financing cost. So the best option is to create a structure where only completed projects falls under here. Hence there is no risk.

“So, to the investors, it is a sovereign risk to a certain extent as the government would be paying,” he explained, adding there is a stable rental by the government.

Another point in comparison is the use and tenancy of the buildings. In PKFZ, there was a need to find investors or tenants to operate out of the free zone.

But with PBLT, there is a ready tenant in the form of the government that would be paying the rent/lease of the completed police stations, quarters and facilities.

There is no indication of tenure and yield as yet and they would be announced only after the book-building exercise.

CIMB Investment bank (CIMB) is the principal advisor and lead arranger for the IMTN programme while Bank Islam Malaysia is the syariah advisor. The joint lead managers are AmInvestment Bank Bhd, Bank Islam, CIMB Group, Maybank Investment Bank Bhd and RHB Investment Bank.

The second tranche of the sukuk is expected this year and local investors are expected to make up the bulk of the participation.