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Foreign issuances; SCR privatisations

Foreign issuances

Malaysia's market regulator, the Securities Commission (SC), along with the Central Bank, known as Bank Negara Malaysia (BNM), recently introduced a host of measures seeking to add both depth and variety to the Malaysian debt capital markets.

These measures are meant to pave the way for quality issuances, both in Malaysian ringgits and foreign currency, by foreign issuers (whether through conventional or shariah-compliant means), as well as to broaden both the issuer and investor base. This would provide aspiring foreign issuers with a new platform for a competitive market, while investors, on the other hand, are presented with greater diversity and choice.

With these measures in place, it is now open season for some foreign issuers, comprising multilateral development banks (MDBs), multilateral financial institutions (MFIs), foreign multinational corporations (FMCs), foreign governments (FGs) and foreign governmental agencies (FGAs) to make inroads into Malaysia and tap the local market.

In ringgits

While the initial measures were principally related to Malaysian ringgit-denominated issuances by MDBs and MFIs, these were followed by more comprehensive changes to allow Malaysian ringgit-denominated issuances by domestically rated AAA (or its equivalent rating by international rating agencies) FGs and FGAs and subsequently to FMCs.

Furthermore, issuances by MDBs, MFIs and AAA-rated FGs and FGAs are now accorded the special status of deemed approved by the SC if the offering documents or information memorandum and summary terms of the information are filed with the SC before issuance and notification is given to the SC of any variations to the terms or structure post-issuance. In addition, one could, armed with international credit ratings, even be exempted from domestic rating requirements.

To further enhance the demand for and the liquidity of these Malaysian ringgit-denominated notes issued by MDBs and MFIs, the SC and the BNM, in a joint communiqué, have recognised the holding of such notes by resident banking institutions as being deductible from eligible liabilities when computing their statutory reserve requirement. Such notes have also been assigned 0% risk weight and have earned the classification as low risk assets: that is, resident insurers may hold these investments to support their margin of solvency. Furthermore, interests paid on SC-approved Malaysian ringgit-denominated bonds issued by MDBs, MFIs and FMCs to non-residents are also tax-exempt.

In foreign currency

As to foreign currency-denominated issuances in Malaysia by foreign issuers, aside from permitting the use of foreign credit ratings, which is a first for Malaysia, foreign issuers are now allowed to apply English and US laws to govern their issuances. The move is an attempt to make them more in tune with international issuances. In addition, issuers with at least a domestic A-rating (or its equivalent rating by international rating agencies) would also be granted the special deemed approved status.

It is worth noting that in either case, whether involving Malaysian ringgit or foreign currency-denominated issuances, the Controller of Foreign Exchange's (BNM) approval would have to be obtained in accordance with Malaysia's foreign exchange currency rules.

Despite challenging conditions in both the domestic and international markets, the overall results for these measures to date appear encouraging, with a clear preference shown by foreign issuers for Malaysian ringgit-denominated issuances, though admittedly the market has been on a downward trend for the second half of 2008.

Notable deals this year include The State Bank of India's RM500 million ($138 million) issuance, Export-Import Bank of Korea's two-tranche RM1 billion issuance, and Gulf Investment Corporation's RM1 billion issuance, all of which took place in the first quarter of this year. The second quarter of 2008 saw Industrial Bank of Korea tapping the market with its RM1 billion issuance and more recently, in June of this year, Woori Bank with its RM750 million issuance.

It is interesting to note that the measures introduced to liberalise and enhance the local capital markets in Malaysia have not been confined to the debt capital markets. In an attempt to incentivise domestic intermediaries (local investment banks, for example) to expand their international businesses, the Malaysian government, in its recent 2009 budget proposal tabled in August 2008, announced that fees received by domestic intermediaries upon the successful IPOs of foreign companies on Bursa Malaysia Securities will be tax-exempt. This should provide additional fiscal incentives for domestic intermediaries to pursue a foreign IPO in Malaysia, even in these difficult times.

Adrian Chair

SCR privatisations

In Asia, where innumerable companies have successfully listed on their respective national or overseas exchanges, there has also been a growing trend to delist or go private.

Several large-capitalised public listed companies have taken the privatisation route in Malaysia, where each case poses a special challenge.

A listed company can go private in many ways and the objective is unilateral: to leave the company with only one or a small group of shareholders. The conventional approach would be for one or a group of shareholders to buy out the shares of all the other third party shareholders, so that only the chosen ones will end up owning all the shares in the company.

An alternative structure is a selective capital reduction (SCR), which does not involve purchasing the shares of third parties but simply cancels all shares not held by the select few. Of course, the company will have to pay the other third party shareholders, whose shares are to be cancelled, an adequate consideration for their agreement.

An SCR is implemented in the same way as any other reduction of capital to return capital to shareholders. Shareholders' approval at a general meeting is required together with court sanction of the special resolution (a 75% majority of the value of the voting shares held by shareholders present and voting at the general meeting) for the capital reduction. Where there are creditors, their consent to the capital reduction must also be procured.

An SCR can be a suitable approach for a privatisation where the target company has significant amounts of excess cash or has access to funding (borrowing), and where it can reasonably be expected that a special resolution can be procured at the general meeting to approve the capital reduction. However, bear in mind that shareholders would expect to receive a payout that is at a premium to market prices. Hence, there are two main constraints: (i) whether there is sufficient cash to meet the payout; and (ii) whether there is sufficient capital to be cancelled to enable the company to pay out a consideration that is higher than market price.

We recently assisted Malaysia's Magnum Corporation (MCB) in undertaking an SCR, which formed part of a wider leveraged buyout (LBO) and privatisation of MCB undertaken by CVC Capital Partners (CVC) acting in concert with Multi-Purpose Holdings, MCB's majority shareholder.

MCB is the largest numbers forecast gaming operator in Malaysia, while CVC is a leading global private equity firm. The entire buyout transaction, which was funded by a mixture of debt and equity, was valued at approximately $1.54 billion.

The structure called for appropriate conditions to be put in place to allow the SCR route to be pursued. First, external financing on LBO terms was made to MCB both through itself and through a special purpose vehicle. If certain conditions were met, the proceeds of the loan would ultimately be routed to and treated as an unconditional gift to MCB, which would then result in MCB having sufficient retained profits, which could be capitalised and then reduced and distributed to shareholders.

There are two significant advantages to this SCR approach: (i) the actual remittance of funds can be delayed until a day that is reasonably close to the court approval date, so that cost of funds can be lower in terms of interest incurred, according more certainty to both sponsors and lenders; and (ii) the requisite shareholder approval threshold that is required for 100% control is significantly lower than having to go through the scheme of arrangement or a plain vanilla takeover structure. For an SCR, only a 75% majority of the value of the shares of those present and voting at the shareholders' meeting is required. This method accords a higher probability of success (regarding third party shareholders), and allows for 100% ownership of the target, as compared to other methods.

By comparison, in a scheme of arrangement the approval threshold is a 75% majority in terms of value and a simple majority in terms of the actual physical number of those present and voting at a meeting convened by the court. This threshold is not only higher (a deal may be scuttled for lack of physical numbers even though the threshold for value has been achieved) but also takes more time because there are essentially two court applications: that is, a first application to the court to convene a meeting of shareholders and a second application to seek the sanction of the scheme.

As an alternative, a plain vanilla takeover offer can be made, but this may not be the most suitable and efficient method if 100% ownership is sought, as there is no certainty that a sufficient number of shareholders will accept the offer to enable the acquirer to initiate compulsory acquisition procedures.

Mak Lin Kum

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