KWAP assumption of MAS perp sparks concerns of high-risk bailout

By Shannon Teoh

Malaysian Insider, June 13, 2012

Abdul Farid Alias, deputy president & head, global wholesale banking, Maybank; Ahmad Jauhari Yahya, MAS Group CEO; and Datuk Azian Mohd Noh, KWAP CEO, at the signing ceremony yesterday. — Picture by Choo Choy May

KUALA LUMPUR, June 13 — The RM1 billion ploughed into Malaysia Airlines’ (MAS) fund-raising efforts by the civil service retirement fund (KWAP) has raised alarm bells as the statutory fund is taking up high-risk perpetual sukuk from the national carrier that recently posted record losses.

Opposition lawmakers have been quick to signal their concern with Datuk Seri Anwar Ibrahim telling The Malaysian Insider it was “irresponsible” of the government to use “funds held in trust as a bailout fund for sick companies.”

“These are savings for their future,” the opposition leader said, referring to the 1.3 million-strong public sector.

MAS is proposing to raise about RM9 billion through a combination of perpetual sukuks, commercial loans and government financial assistance.

MAS announced yesterday the pension fund had taken up the entire first tranche of RM1 billion of its perpetual sukuk, which does not carry a government guarantee, and will pay a 6.9 per cent coupon in perpetuity.

Perpetual bonds, also known as perps, are considered higher risk bonds as there is no guarantee of repayment and the issuer does not have to redeem them.

However, MAS, which is the world’s first corporation to issue an Islamic perp, has a call option to redeem the sukuk at the end of the 10th year and on each following periodic distribution date.

But DAP publicity chief Tony Pua told a press conference today “the government chose to put at risk decades of savings by our civil servants, digging deep into its reserves.”

“Should anything happen to MAS’ ability to repay its debts, then the government will be forced to conduct bailout after bailout,” the Petaling Jaya Utara MP said of the deal which places the RM1 billion loan by KWAP at the lowest priority of repayment.

MAS’ move to issue a total of RM2.5 billion in perpetual sukuk allows the troubled airlines, which posted a record RM2.5 billion loss for the last financial year, to raise money without affecting its gearing ratios as it is treated as equity under Malaysian accounting conventions.

MAS, which has posted consecutive losses for the past five quarters, is proposing to raise about RM9 billion through a combination of perpetual sukuks, commercial loans and government financial assistance.

Datuk Seri Anwar Ibrahim today told The Malaysian Insider it was “irresponsible” of the government to use “funds held in trust as a bailout fund for sick companies.” — file pic

Interest in perpetual bonds has risen in the region, prompting the Monetary Authority of Singapore to express concern over the demand for the higher risk fixed income instruments.

The Thai SEC (Securities and Exchange Commission) also issued a warning earlier this month for investors to fully understand the details of subordinated debentures, which is corporate debt that ranks as a low priority for repayment.

MAS said that the perpetual junior sukuk will be recognised not as debt but as equity, and payment obligations will at all times be junior to the claims of present and future creditor of MAS but ahead of other share capital instruments.

Interest in perpetual bonds has grown as companies look to take advantage of the opportunity to raise funds without any impact on gearing ratios and investors look for higher payouts in the current low interest-rate environment.

Reuters reported that more perpetual bonds, which are uncommon in Malaysia and mostly issued by banks, were sold in Singapore in the first three months of 2012 than in the previous 15 years.