The Business Times, Singapore 19th March 2001

Danaharta and EPF taking a 'haircut' on their loans, but what about KWAP?

Comments by Eddie Toh

CRITICS have been vocal about the heavy involvement of the Malaysian government in the controversial initial public offering of Time dotCom.

The IPO was a total flop when it closed last month. The offer of 572 million shares to the public was undersubscribed by a massive 75 per cent. As expected, government agencies emerged as owners of the unwanted shares. They are Kumpulan Wang Amanah Pencen (10.82 per cent), the Employees Provident Fund (3.22 per cent) and Pengurusan Danaharta Nasional (3.16 per cent).

The critics have a right to be concerned, given the widespread warnings that the share price would nosedive on debut. The prediction came true. The share price has plummeted to RM2.12 from its IPO price of RM3.30, erasing nearly RM3 billion in Time dotCom's capitalisation in one week.

But critics should also look at the basis of each government arm's investment decision and the history of the dismal IPO.

It should be noted that the EPF, the guardian of workers' savings, and national bad-debt recovery agency Danaharta did not pump in cash for the unwanted Time dotCom shares. The two agencies were creditors of Time Engineering, the parent of Time dotCom, and converted their loans into equity in Time dotCom, arguably the next best thing short of getting their cash back.

Under the creditors' agreement with Time Engineering, creditors should have been repaid from the proceeds of the IPO. However, it has been a difficult and unusual exercise for the IPO promoters.

Time dotCom could have been listed last year -- when market sentiment towards telcos and dotcoms was markedly better -- if it had tied up with Singapore Telecommunications. The Singapore telco was all set to inject RM2.4 billion (S$1.12 billion) into the owner of the fibre-optics network running the length of the Malaysian peninsula.

However, Malaysia's political establishment vetoed the deal due to concerns over the entry of a telco seen to be controlled by the Singapore government. The partnership with SingTel would have generated tremendous synergy and greater enthusiasm towards the IPO. After all, SingTel was willing to pay the IPO price of RM3.30 apiece for a 20 per cent stake in Time dotCom.

Following the failed union with SingTel, promoters of the Time dotCom IPO have had to redraw their game plan. Another Malaysian agency, Khazanah Nasional, replaced SingTel but its pricing was lower than SingTel's offer. Furthermore, Khazanah does not have expertise in the fast-changing telecom business.

As a result of the changes and the subsequent aversion to tech stocks, analysts downgraded the valuation of Time dotCom substantially. However, there was little room to tinker with the IPO price.

Unlike normal companies en route to a listing, Time dotCom's IPO was part of a debt restructuring exercise cobbled together by the company and creditors like EPF, Danaharta and almost all bankers in town. Every creditor wanted to be repaid in full.

But the massive undersubscription and the subsequent sharp drop in the share price made it almost impossible for the underwriters to place out the excess shares to other investors to raise the cash to pay Time dotCom's creditors.

Hence, it is not totally unreasonable for EPF and Danaharta to shoulder part of the responsibility by converting their debts into equity. Although they are no longer exposed to the bad debts, they are sitting on paper losses. They are, in effect, taking a "haircut" on their loans.

While EPF and Danaharta could possibly justify their actions, it's more difficult to fathom why KWAP decided to take such a big bet on Time dotCom. KWAP, which manages the savings of the country's pensioners, was not a creditor of Time Engineering. Yet it forked out RM904 million in cash for the third largest slice of Time dotCom. KWAP is sitting on a huge paper loss of RM323 million. The agency should explain why and how it ended up with such a massive stake in Time dotCom.