Time for cash and capital

In a world of highly indebted hedge funds, cash and capital are sources of strength. In Malaysia, portfolio investment funds should be built through listed closed-end funds that do not face redemptions whenever there is public panic. 

ALL financial news is foreign now – sub-prime loans, hedge funds and discount rate cut. 

It's such issues in the US that determine or undermine sentiment in the stock markets and currencies in Asia. 

Investors fretted over uncertainties in the ability of financial institutions to raise financing as lenders were either preserving cash or they were also worried over the stability of borrowers.  

On Thursday, Countrywide Financial, the biggest mortgage lender in the US, raised cash by borrowing US$11.5bil from 40 big banks. That spooked an already nervous stock market, and Countrywide's own shares were sold down.  

It would have calmed the markets if a strategic investor infused equity into Countrywide instead of its reliance entirely on more debt. There were a few incidences of fund managers injecting capital into the system.  

When hedge fund Sorwood Capital Management failed, it reportedly returned, to its credit, a large portion of US$90mil in fees to its investors. At the same time, Citadel Investments, another hedge fund, bought over the credit portfolio of Sorwood after its investors took a 50% haircut.  

It was also reported that hedge funds led by TPG bought some of the debts issued by Kohlberg Kravis Roberts & Co to banks for returns of 18%.  

US-based private equity firm Apollo will inject US$1bil into NCL Corp for a 50% stake

These sales of distressed assets were, no doubt, made at discounted prices but investors were able to exit and get some of their money back, after taking their losses. It would help the credit congestion if there were more of such deals.  

One source of capital could be sovereign wealth funds but it has not been their purpose to invest in distressed financial assets.  

This could be a time of opportunity for cash-rich institutions, especially as stocks were sold regardless of value in the midst of uncertainties.  

In Malaysia, the institutions that have loads of cash include the Employees Provident Fund (EPF), Permodalan Nasional Bhd (PNB), Kumpulan Wang Amanah Pencen (KWAP), Lembaga Tabung Haji (LTH) and of course, Petronas, the national oil corp.  

Among corporates, Hong Leong Company (M) Bhd controls Guoco Group Ltd, listed in Hong Kong, which held HK$30.6bil (RM13.5bil) in cash and other financial assets, YTL Corp Bhd held RM8.6bil and Genting Bhd RM7.7bil.  

The EPF receives hundreds of millions of ringgit from contributors every month, of which a significant portion is then invested in stocks. PNB and LTH are both believed to be also cash-rich. In addition, PNB manages Amanah Saham Nasional Bhd (ASN) which receives cash from new unit trust holders every month.  

Both PNB and LTH invest substantially in the stock market, as does KWAP which receives grants from the Government every year to enable it to build up a fund to pay the pensions of civil servants in future. While Petronas is also believed to invest in stocks, its cash is principally deployed for oil and gas assets. That also applies to Petronas Gas Bhd which held about RM1.4bil cash.  

That's also the case with other large Malaysian corporates which were waiting for an opportune time to snap up strategic business assets. YTL Corp Bhd, for instance, is understood to have patiently waited to acquire more utility assets from distressed corporates.  

Guoco Group has also waited with patience for good assets to be acquired at a low price, as it kept its billions ready.  


Foreign flows 


The plunging roller coaster ride on the stock market in the last two weeks showed once again the pros and cons in having a huge inflow of foreign portfolio funds. That quickly became an outflow in which sell orders were given without any consideration of value in the stocks.  

It has, however, long been a settled issue that developing countries need such foreign inflows. There are insufficient domestic investment funds to support interest and excitement in the market.  

An absence of foreign funds would relegate the market to a permanent state of boredom.  

One obvious way to improve is to increase the pool of domestic portfolio funds. That could be done by encouraging more closed-end funds to be formed and listed on Bursa Malaysia. Currently, there are only two – Amanah Millenia Fund Bhd and icapital.biz Bhd – and the former is expected to be de-listed and liquidated.  

There are two advantages in closed-end funds. Firstly, they do not face redemption from unit holders, unlike the open-ended unit trusts which face heavy redemption from their unit holders from time to time.  

Secondly, listed closed-end funds can invest in small cap stocks in which trading liquidity is low. This is unlike unit trusts which have to invest in stocks where trading liquidity is ample so that they can exit quickly if they face a rush of redemptions. 

The unit trust industry has developed very well over the last 30 years. The time has come for them to be complemented by listed closed-end funds.  


Corporate flows 


It’s not only banks, mortgage companies and hedge funds in the US that need an infusion of capital. 

It is also useful for corporates to recycle their fixed assets for fresh capital funds that would enable them to reduce their debt levels or expand their operating businesses.  

There were several capital recycling deals last week. On Wednesday, Berjaya Land Bhd (BLand) announced it would sell its KL Plaza shopping centre and 59 apartments in an annexe block for a total of RM470.5mil cash.  

That would enable BLand to pay off the debts attached to those properties, and the group would post a net gain of RM143mil. The buyers are two private companies in which the owners are not known.  

On Thursday, Country Heights Holdings Bhd (CHHB) said it would sell its Mines Shopping Fair to Singapore's CapitaLand Ltd for RM432mil cash. CHHB said it would use the cash to repay its loan stocks series A amounting to RM420mil.  

After that, CHHB's gearing would be lowered from 1.5 times to 0.6 times. It would also give rise to a gain of RM102mil.  

On Friday, Star Cruises Ltd told the Stock Exchange of Hong Kong it would embark on a partnership with US-based private equity firm Apollo Management. 

Star Cruises, in which Resorts World Bhd has a stake of 19.8%, would allow Apollo to subscribe for a 50% stake in its subsidiary NCL Corp Ltd for US$1bil (RM3.5bil) cash. That is a lot of fresh capital from the new partner for Star Cruises which turned around from a loss last year to a net profit of US$23.4mil (RM82mil) for the quarter ended June 30, 2007.  

Following this deal, NCL would cease to be a subsidiary of Star Cruises which would still own a stake of 50% in the company. NCL owns 13 cruise ships that operate in North American waters through its three brands, Norwegian Cruise Line, NCL America and Orient Lines.  

There could also be business synergies in the partnership as Apollo, with TPG, is acquiring Harrah's Entertainment, the world's largest casino-related entertainment group, for about US$17bil.  

Last week's deals are positive for the corporate sector as they introduce sizeable new capital into the companies which could then conduct their businesses with less borrowings or expand without increasing their borrowing levels. 

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