Malakoff bondholders in a bind

  • Business
  • Thursday, 17 Jul 2008

They are concerned over impact of windfall tax

PETALING JAYA: Bondholders of the country’s largest independent power producer (IPP), Malakoff Bhd, held an informal meeting yesterday to discuss the impact of the windfall tax on the industry.

They are also mulling over plans to lobby their position to the Government.

Sources told StarBiz the bondholders concluded that the tax would have a wider impact on all infrastructure-related bonds and not just IPP bonds.

Owing to Malakoff’s size, almost every financial institution in the country had exposure to its bonds and was therefore represented at the meeting, a source said.

He held the view that the Government should tax the excess gains from shareholders’ returns and not the bondholders, which were contracted to a fixed return and did not benefit from excess gains.

According to the Association of IPPs in Malaysia in an earlier interview, the windfall levy was to be based on earnings before interest and tax divided by the fixed assets at net book value.

“The windfall tax should be made after interest, so that debt holders are not affected,” the source said.

Also, IPP earnings had been contracted for at fixed rates compared with other industries that benefited from higher market rates in commodities, he added.

“So there shouldn’t be that much tax on excessive returns,” he said.

An arbitrary tax that causes a change in cash flows can have larger market implications.

“The implication is huge, all investors will be concerned, affecting confidence of foreign investors on the Malaysian market and affecting funding options of Malaysian companies,” the source added.

KSC Capital director of research Choong Khuat Hock, whose house does not have exposure to Malakoff bonds, told StarBiz the whole bond market had come in against the windfall tax issue.

“There are implications to the general infrastructure sector bonds and the (investors') perception of the security of cash flows,” he said.

The negative impact of the windfall tax was expected to raise borrowing costs in the corporate bond market in general.

Of the IPPs in the country, Malakoff would be the most affected by the windfall tax with most – if not all – of its power plants within the country.

Other major IPPs, such as YTL Power International Bhd, made 70% of its revenue from overseas, and Tanjong plc had also been aggressively expanding its power generation business overseas, Choong said.

 MALAKOF :  [Stock Watch]  [News]

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