URGENT action is needed to address the problem of water bond downgrades that have caused the bonds to lose RM1bil in market value.
Banks and institutions which are mostly allowed to hold bonds only in the A categories found themselves owning single-, double- and triple-B rated water bonds which they either have to sell or provide for, as the market value has dropped drastically.
While the water restructuring issue, which affects the revenues of the firms involved, is still being sorted out by the Selangor and Federal Government, the status of these bonds remain in limbo. Some of the marked-to-market losses are expected to hit the profit and loss accounts; the provisions may be reversed if the bonds do not default.
It is true that investors should have conducted a thorough credit evaluation that took into account not just credit but also political risks. But at that time of purchase, it was not envisaged that an opposition government would prevail in Selangor.
It was assumed that all plans for the water sector and tariff increases would proceed without a hitch.
While efforts are ongoing to break the current deadlock in restructuring talks, the Federal Government is looking seriously at the financial implications, especially following the bond downgrades, on bondholders that are the banks and other institutions, and possibly down the line: their investors.
Any losses or provisions made in their books will ultimately hit investors holding shares in some of these banks or institutions which is said to include the Employees Provident Fund and Great Eastern.
The repercussions can be severe but at this juncture, very few are taking the worst-case scenario and started providing for the losses, as the Federal Government is expected to step in, based on the “too big to fail'' idea.
Analysts said among the possibilities, the Federal Government can swap the existing bonds for government-guaranteed bonds.
Some industry players said they would wait until the first non-payment of interest hits them.
In totality, the exposure of the Malaysian bond market to water-related bonds is about RM10bil, of which RM7bil is rated by Malaysian Rating Corp (MARC) and the rest by RAM Ratings.
In its downgrade announcement last Wednesday, MARC had referred to the companies' “increasingly challenged liquidity positions'' arising from the unresolved deadlock in talks between Selangor state and Federal Government as well as water concessionaires on the restructuring of water assets in the state.
Subsequently, Puncak Niaga Holdings Bhd, one of the water concessionaires, told Bursa Malaysia two days ago: “The rating actions by MARC had resulted in the rating of some of the group's debt to fall below the minimum required under their respective trust deeds.
“While the current rating prevails, an event of default exists on some of the group's debt wherein the revised rating is below the minimum level. If allowed to remain, further action (if any) by the respective bondholders could result in a default on the group's debt obligations,'' said Puncak, which issued RM546.88mil of redeemable unconvertible junior notes.
The company is calling for a bondholders' meeting “to seek for certain waivers from the bondholders to address the current situation.''
Puncak said yesterday the meeting was fixed for May 5.
Meanwhile, the timeline for the restructuring talks keeps getting pushed back with the latest deadline being the end of June or July, according to some industry players.
The test, at this crucial juncture, is whether the parties are willing to execute the plan.
As in any negotiations, there will be disagreements but among those who genuinely wish to arrive at a solution, there will always be alternatives to counter the difficulties. - THESTAR
● Associate editor Yap Leng Kuen believes where there's a will, there's a way.
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