MRCB/UEM Land ... May 09

With the government’s Financial Guarantee Institution (FGI) expected to be launched in the middle of May 2009, speculation is rife as to which companies could utilize the initiative to issue debt papers amid the lackluster corporate bond environment.

Under the RM60 billion second stimulus package announced in Nov 2008, the government had tasked BNM with setting up the FGI, which would provide credit enhancement to companies intending to raise funds from the bond market. PM & Finance Minister Datuk Seri Najib had said RM15 billion worth of bonds is expected to be raised under the facility.

Najib had also acknowledged that issuers with less than AAA- rating were finding it difficult to enter the market, due to investors’ warning risk appetite. This was as a result of the economic slowdown, which sparked off a flight to safe to mentality with regard to demand for bonds.

Even until now (May 2009), it is difficult for investment bankers to market papers rated anything less than AAA. Investors are extremely cautious about companies’ ability to pay back bonds. They are even very selective about AA-rating issuers.

While industry observers do not go so far as saying that there is a credit freeze, they do agree that FGI could help heat up the bond market. Government linked companies with infra projects are said to be waiting, especially those that are benefiting from development spending under the 9MP or the stimulus package.

Another set of companies likely to take up the government guarantee are existing borrowers of the debt market with a low A credit rating.

MRCB could be one of the companies to take up the facility. The company has a coupled of projects in hand and could do with some cheap financing. It may want to take advantage of a government guarantee to issue papers to finance these projects, or even refinance existing debt. The company had in June 2008 issued a Rm845 million facility was rated AA3 and the RM199 million facility rated A2 by RAM Ratings.

MRCB’s current projects consist mainly of the development of properties in KL Sentral, while it will also undertake the development of the RM2 billion Penang Sentral transport and logistics hub project.

As at end 2008, the company has RM196 million in cash and has a long term borrowings stood at RM1.06 billion as at Dec 31, 2008.

UEM Builders (A subsidiary of UEM Land) could be another company to take up a guarantee from the FGI because of its contract to build the second Penang bridge.

The company’s unit , Penang Bridge Sdn Bhd had issued a five year al-bai’ bithaman ajil facility maturing in Aug 2013. The facility, amounting to Rm785 million, has an interest of between 6.85% and 8.5% and was rated AA2 by RAM.

Given the company’s ongoing works on the Penang Bridge, and the upcoming Second bridge project which is projected to cost RM4.3 billion, the company may want to take advantage of the FGI to issue bonds.