Tuesday, June 12, 2012

KWAP taking up MAS "perp" is close to your bailout of the airline?

First, let me highlight these few things:

What is Perp?
Perpetual bond, which is also known as a Perpetual or just a Perp, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt. Perpetual bonds pay coupons forever, and the issuer does not have to redeem them. Their cashflows therefore, those of a perpetuity. Examples of perpetual bonds are consols issued by the UK Government. Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital, and help the banks fulfil their capital requirements. Most of these bonds are callable, but the first call date is never less than five years from the date of issue—a call protection period.

What is KWAP?
KWAP was incorporated in March 2007 to help the government in funding its pension liability. 

Who contributes to KWAP?
The Federal Government contributes 5% of the total annual budgeted emolument of the Federal Government employees while Statutory Bodies, Local Authorities and Agencies contribute 17.5% of the basic salaries of their pensionable employees respectively to KWAP on a monthly basis.

Now, my question is with the instrument not redeemable (except for MAS who has the option under certain circumstances) and with NO MATURITY DATE, wouldn't it be close to a bailout? Who buys up this perp issued by MAS? KWAP, which is government's pension liability fund. What if when KWAP loses money? Government will still pay the pensioners right? So wouldn't it be close to your usual bailout, I wonder?

With the issuance of perp then, it is categorised as an equity in the balance sheet, hence MAS is boosting up its balance sheet in fact. What if MAS is not able to pay its dividends listed at a rate of 6.9%? Should it be regarded as a bad debt or just a carried forward owing? How creative.

I am reading with disgust that MAS can redeem the sukuk in the event there is a change in recognition in accounting treatment from equity to debt. Isn't this another accounting play? The fundamentals of the instrument is the same. At a time when most government are cracking down on investment banks taking opportunity of "off balance sheet" item and/or accounting loopholes, these guys are working in tandem embracing it.

Other articles on MAS financial debacle.

PETALING JAYA, June 12 — Malaysia Airlines’ (MAS) fund-raising efforts received a boost today when the civil service pension fund (KWAP) took up the entire first tranch of RM1 billion of the airlines’ perpetual sukuk today.

MAS also said in a press conference here that it received firm commitments for the rest of the RM1.5 billion of the perpetual sukuk, which MAS said today does not carry a government guarantee.

Perpetual bonds, also known as perps, are considered higher risk bonds as there is no guarantee of repayment.

The perpetual sukuk will pay a rate of 6.9 per cent and is not rated. It allows the financially troubled airline to raise money without affecting its gearing ratios as it is treated as equity under Malaysian accounting conventions.

“We consider it the cheapest form of equity,” said MAS deputy group CEO Mohd Rashdan Yusof. “It’s a great deal for our shareholders.”

MAS group chief executive Ahmad Jauhari Yahya said the successful subscription of the first tranche indicated the trust investors had in the airline.

“This firmly secures the first pillar of our funding plans and is testament of the confidence in MAS,” he said.

Ahmad also said he hoped the proposed government-funded special purpose vehicle (SPV) that will be used to finance the delivery of MAS aircraft will be finalised by the end of July.

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

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.

The tenure of the sukuk is perpetual and MAS has a call option to redeem the junior sukuk at the end of the 10th year and on each following periodic distribution date.

MAS can also redeem the junior sukuk if there is a change in accounting standards resulting in it no longer being recognised as equity.

The airline may also defer periodic distributions but the deferred distributions will be cumulative.
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, informally called perps, were sold in Singapore in the first three months of 2012 than in the previous 15 years.

Perps are uncommon in Malaysia and mostly issued by banks.

MAS is also the world’s first corporation to issue an Islamic perpetual bond.

1 comment:

Anonymous said...

thanks for posting, good article