Lion takes a bold move forward


  • Business
  • Saturday, 29 Mar 2003

BY ANITA GABRIEL

ASK the bankers. They will tell you this about Tan Sri William Cheng. He is a staunch advocate of the rule that every sen borrowed must be repaid.  

Even as Lion Group, once a captain of industries, came crashing down on the high cost of borrowing on RM10 billion debts and dwindling returns since the past crisis dealt it a cruel blow, Cheng was adamant that the rule should be adhered to. 

“We had to know his philosophy before we got in to advise the group. He told us from the start 'I want the bankers to get back every dollar they lent me,'“ says an adviser to the group. 

One more thing the bankers will tell you is that over the years of tedious, painful negotiations with over 100 creditors, Cheng had been present at all the meetings.  

A banker says: “He would be laid back ... say a few words and allow his advisers to do the talking. But he attended all the meetings and for that, he should be given kudos.” 

So, when BizWeek met up with Cheng, over the week, the man, once hailed as a high-flyer and chieftain of a mammoth group with diversified business, revealed none of the traits possessed by most corporate chieftains eager to vindicate themselves from the problems in their companies. 

“The important thing is to prove that we are a worthwhile investment. So, now we're working very hard to make sure profitability and investment returns are there. The last few years, everybody tried to avoid us. This is also the first time since two years ago, we have invited the press for a session,” says Cheng. 

Reality check has left its mark. Cheng, 59, made no promises, did not talk up the debt workout plan and admitted to past mistakes.  

In short, all Cheng and the sprawling group have to offer today is results. And as eager as one would be, even now, to stick a fork in the group’s workout plan, the positive results are already showing.  

After a long, gruelling and patchy five years, Lion Group has reached full-blown restructuring mode. By no account, should this be taken lightly. Lion Group’s restructuring is the next big story after United Engineers (M) Bhd/Renong Bhd group’s debt restructuring. 

But unlike the Renong group, where the government swooped in to take control and was left with the arduous task of turning it around, Lion's shareholders and management stayed on to make good of past mistakes.  

But like the Renong group too, some quarters are quick to point out, Lion Group got its fair share of support from the government, particularly on tax matters to help its steel operations. 

Still, it has been a Herculean task. With seven listed companies under its stable, it took three years for it to work out a complex plan and another three years to get all creditors – secured, unsecured, foreign and local – to approve the plan. 

But as Lion Group's executive director Heah Sieu Lay will admirably admit to it, the group got the final (overwhelming) nod from creditors, for two reasons – the plan was acceptable and perhaps more so, it has just taken far too long.  

As a result, Lion Group has restructured debts totalling RM6 billion (including the nagging inter-company loans of RM1.5 billion), rescheduled a large portion of its debts via two- to-ten-year debt papers, divested RM2 billion worth of assets with RM4 billion more targeted for disposal over the next four years, and cleaned up its operations to make way for a neater and more focussed structure.  

Four listed entities – Lion Corp Bhd, Lion Industries Corp Bhd (formerly Lion Land Bhd), Amsteel Corp Bhd and Silverstone Corp Bhd (formerly Angkasa Marketing Bhd) have also had a capital reduction. Following the revamp, Lion Group’s main businesses will comprise steel, pulp and paper, tyre, retail and property. 

The good news – two revisions in projected cash flows later, the group, as Cheng says, is now right on target to meet those assumptions. This is extremely crucial to the success of the whole plan as the redemption of the bonds largely hinges on the projected cash flow from these operations. 

Most noteworthy is that Megasteel Sdn Bhd looks set to cap three years of consecutive losses. 

“The turnaround in the steel business is terrific. It’s doing very well,” says a convinced banker.  

For the first half ended December 2002, the steel company made a net profit of RM54 million. 

Megasteel is protected by a 25 per cent import tariff that was raised to 50 per cent in March last year to prevent dumping by foreign producers. With the tariffs, some market observers say, Megasteel has outpriced the other producers, thus boosting demand for its products among domestic manufacturers. 

Also, a major contributing factor to Megasteel’s viability is its monopolistic market position in the country as the sole producer of hot rolled coils.  

On the back of this, the steel company is poised to meet its profit projection of RM303 million for the year ending June 2003. 

Cheng attributes the sharp turnaround to aggressive efforts to enhance productivity and cut costs. 

However, it’s hard to dismiss Cheng’s hand in all of this. “Every morning I’m here (at the office) and every afternoon, I’m at the plant. I do that every single day unless I’m overseas because I need to really push to make this (steel business) work. Earlier, I allowed my people to do it but now, I am personally involved. 

“What’s most important is to make sure everything is in order and we achieve our targets,” says Cheng. 

Still, it is early days yet to see if Lion Group will resume, if ever at all, its place among Malaysia’s corporate darlings.  

Below are excerpts of BizWeek's interview with Cheng and clearly, his much-trusted Heah:  

 

BizWeek: It’s taken so long to get to this point for Lion Group. How does it feel? 

Heah: It’s taken a long time ... almost four and a half years, to complete for various reasons. The scheme entails four listed companies within the group – Silverstone, Lion Industries, Amsteel Corp and Lion Corp Bhd. 

Basically, it’s a debt restructuring together with a corporate restructuring to negate the inter-company loans prevalent within the group. The primary focus was to get debt restructuring done and stabilise the group.  

Unfortunately the scheme was a bit convoluted because we had in excess of 100 creditor bankers and there were various problems throughout the course of the restructuring. We were also caught by certain events which necessitated us to re-look cash flows going forward as business was affected. So, we had to go to the SC (Securities Commission) twice to recall the submission because basically the assumptions we were going on were no longer reasonable ... that took up a lot of time.  

But finally, we got the agreement from the banks. As far as lenders are concerned, there was only one company that did not get a 100 per cent vote. So, the past few years' hard work has not gone astray. We had full support from banks and our trade creditors or non-financial institution creditors in excess of 80 per cent. 

All in all, it may seem a long time but it has been completed and we work towards stabilising the group. Business is actually picking up in most of the industries or our key operating companies and that’s important because we need the cash flow to repay the banks going forward, and that includes our divestment programmes as well.  

Cheng: Of course, our team had a tough time and bankers were tired. Luckily, a lot of bankers understood but it was tough. Now, what’s important is to focus on our core business. We are trying to divest those with less potential and focus on those with good potential where the management is also strong. 

 

You’ve had to revise the scheme because certain assumptions became inaccurate due to the change in general business environment. The environment is far from certain now and still rather volatile. How sure are you about meeting those targets? 

Heah: Volatility in market is always there. When we completed revising the forecast in terms of cash flows going forward, we think it was at the bottom of the market and over the past six to nine months, our results have actually exceeded our assumptions in terms of profit forecast. 

For most of the companies, come end June 2003, in terms of operations we would have met the forecast. We have been very aggressive in terms of cash flows going forward as well and our assumptions were fairly conservative in my mind. So, I think we should be able to meet them ... especially the steel business, we are on target at the moment. Businesses like pulp and paper, we’re just slightly above target.  

Cheng: Our core business will be steel and I can say that almost all have turned around already and are profitable. Some have even exceeded our forecast. We’ve had to improve productivity and yield and do many other things. For Megasteel, the last few months’ profits have almost doubled or more but we still need to see further improvement  

Only thing, recently the price of scrap material has shot up from US$110 last year to US$200 now. 

 

What is the reason for the turnaround? 

Cheng: We improved on productivity and yield. Market demand had also improved slightly. And those we don’t produce, we can import without duty. At the moment, the international price is very good. We are also exporting our products to other countries. Actually, the export market is sometimes better than the domestic market. We export to China, Australia, Italy and Spain. 

 

You say the group got strong support from the creditors. Do you think it’s due to the soundness of the scheme itself or the fact that it’s taken so long, the creditors must have just said “we can’t do this any longer, let’s just approve the plan”? 

Heah: (laughs) It’s probably a mix of both. As you say, the restructuring has taken a long time by any standards. But over three to four years, we’ve had meetings with the lenders on a weekly basis if not on alternate day basis. 

So, it’s a scheme that has their concurrence and also a scheme that has taken so long, probably all of us got tired and agreed on it.  

 

Besides, it wouldn’t have worked in their favour to drag the case any longer ...? 

Heah: Yes, it wouldn’t have ... not ours, not theirs. Bearing in mind the group’s debt is one of the largest in the country, we also had some pressure to finalise it. 

 

Your experience with the Corporate Debt Restructuring Committee is quite interesting. When Lion Group first sought the help of CDRC, Datuk C. Rajandram helmed it and then mid-way to the final stages of the scheme, you had to work with Datuk Azman Yahya. Were there any major differences? 

Heah: There were no significant differences. It’s just that when Azman came in, we were fairly advanced so it seemed faster. But we had support from both. 

 

Are you looking at acquiring more steel assets or businesses? 

Cheng: In the last few years, we’ve already privatised Sabah Gas and also Antara (Antara Steel Mills Sdn Bhd). So, no, we’re not. 

Heah: Apart from the overall facility we are looking forward to putting up, we’re not contemplating any additions to the steel business. 

 

Tan Sri, do you feel the hardest task for Lion Group has been addressed? 

Cheng: Yes 

Heah: The single most important thing that came out of this restructuring is that we have fixed our (borrowing) rates. We couldn’t afford to have a situation like in 1997 whereby interest rates shot up to 20 over per cent.  

So, in future if the interest rate goes up ... which it may in the next three to four years ... Lion Group has capped its downside.  

 

But isn’t it harder to improve on operations? 

Cheng: Those two are tough negotiations. The debt restructuring was not easy but finally they (bankers) achieved what they wanted and we got to achieve what we want. We’ve given the bankers fair terms. 

And it is my duty to make sure everything is in order 

 

Can you elaborate on the divestment plan? 

Heah: As part of the scheme, there is currently a substantial four-year divestment programme, the proceeds of which will be used to redeem the bonds.We have identified all assets and identified in terms of timing, in terms of valuation. All that information is with the Securities Commission. They have an idea of what value we think we can get for the assets as well. Obviously, we are not disclosing that to anyone else apart from our advisers because we can’t be telling everyone what we’re going to sell at what price. 

 

Why did you need to do that? 

Heah: Well, we needed to give authorities and banks comfort in terms of our redemption profile. The bonds are redeemed every year. In the initial years, obviously the redemption will be from asset divestment and that’s precisely why our advisers have knowledge of it. 

 

What happens if you don’t meet divestment targets? 

Cheng: We are quite confident. We know what the value of each company is and we are very conservative in our valuation of these assets that are at the lower scale. We are also looking at some assets in China and for that we’re in final stage of negotiations 

Heah: Of the RM4 billion targeted for divestment, none has been completed except for the sale of Hotel Century.  

 

The stock of Lion Corp is getting requoted under such a volatile market environment. Any apprehensions? (Under the scheme, Lion Corp Bhd shares are offered to the shareholders of Lion Corp and issued to scheme creditors. Depending on the performance of the shares subsequent to the restructuring scheme, the price at which the shares trade, may or may not correspond with the value/price of the shares assumed in the scheme) 

Heah: It could come at a better time of course, but under the circumstances, we waited so long for this, so it’s as good a time as any. 

 

Will Lion Group ever get back to those days when it was much sought after? 

Cheng: I don’t know. You know better.  

 

Your biggest regret Tan Sri? 

Cheng: I don't think I have any because we’ve tried our best. 


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