From The Asian Wall Street Journal 13th December 2000

By DOUGLAS APPELL Staff Reporter

KUALA LUMPUR -- Malaysia's stock market suffered only minor damage Tuesday in the wake of the Renong group's latest failure to address its crushing debt, but analysts are lamenting a lost opportunity to resuscitate investor interest in the country.

The Kuala Lumpur composite index dropped 1.5% on the day, but Renong tumbled 13% and its United Engineers Malaysia affiliate fell 11%. The group's drubbing followed UEM's announcement late Monday granting Renong Chairman Halim Saad 15 more months to honor his pledge to buy back a huge block of Renong shares from its affiliate. The group's perceived ties to the country's dominant political party have made Renong a focus of fund managers' concerns about corporate governance.

Analysts say that foreign investors -- already wary about the slow pace of corporate restructuring in Malaysia -- will now have further reason to avoid the country. Bank Negara Malaysia, the country's central bank, reported recently that foreign portfolio investors have taken $2.6 billion out of the country since May.

While the market didn't plunge Tuesday, ING Barings analyst Uday Jayaram said the more important point is that it lost a major chance to bolster its credentials and pave the way for it to benefit when overseas money eventually flows back into Asian stocks.

The curtain rose on the Renong drama three years ago, with UEM's announcement that it had taken on debt to buy a 33% stake in its parent. That prompted the broader market to plunge by 6.8% in a single day, as investors feared their interests could be compromised if other companies made similar moves.

The next act came the following February, when Tan Sri Halim, in an attempt to mollify investors, made a Valentine's Day offer to UEM of a put option, obligating him to buy back the Renong block at cost plus financing. Analysts pegged the per-share cost of the options -- which expire on Feb. 14, 2001 -- at roughly 4.40 ringgit ($1.16).

With Renong's shares trading at well below two ringgit in recent months, investors have been focused on how Tan Sri Halim was going to raise the more than 3.2 billion ringgit needed to honor his option. The executive had repeatedly assured analysts and investors that he would meet his obligations.

Monday's announcement by UEM that it would accept three payments of 100 million ringgit each in the coming year, while allowing Tan Sri Halim to foot the remainder of the bill by May 2002, proved a major disappointment.

Despite considerable doubts, "at the back of people's minds they were hoping that he would pull a rabbit out of a hat" and provide a catalyst to drive the market higher, said Terence Wong, the head of research with GK Goh Securities in Kuala Lumpur.

Instead, investors now have to accept that progress in corporate restructurings could be glacial, a prospect that could result in a lowering of Malaysia's crucial sovereign-debt ratings by agencies such as Moody's and Standard & Poor's.

Chew Ping, S&P's associate director of sovereign ratings in Singapore, says that corporate and financial-sector restructuring will be key to changes in Malaysia's ratings. But while the Renong affair isn't positive, the rating agency is looking at a broad range of potential developments in the corporate sector, he said. He cited Malaysian Airline Systems and Telekom Malaysia as two potential restructuring candidates.

Although analysts say they are pessimistic about the Renong group and the broader market, many expressed surprise at how many foreign investors still hold UEM's stock. One institutional salesman who traveled recently to Europe said roughly two-thirds of the fund managers he met there had the company's shares in their portfolios.

UEM said Monday that foreign investors hold roughly 23% of its shares.But amid a flurry of "sell" recommendations by analysts Tuesday, that is almost certainly set to decline. On Tuesday, 10.6 million UEM shares changed hands en route to a 38-sen drop to 3.24 ringgit a share. Renong's shares dropped 18 sen to 1.20 ringgit a share.

Renong group officials weren't available for comment.