Moody’s views aid to Felda as credit negative

  • Business
  • Friday, 19 Apr 2019

Controversial transaction: In April 2017, Felda completed the purchase of a 37% stake in Eagle High from Rajawali for US$505.4mil, which was reportedly higher than the valuation by two independent appraisers on the company of US$264mil and US$404mil, respectively.

PETALING JAYA: Moody’s Investors Service views the government’s financial aid of RM6.2bil (US$1.5bil or 0.4% of gross domestic product or GDP) to the Federal Land Development Authority (Felda) as credit negative.

The rating agency said the financial assistance would add to the government’s debt burden, which is already significantly above the median of A-rated sovereigns.

“We estimate that the assistance would raise the government’s debt burden by 0.3% of GDP to 56% in 2019, substantially higher than the median debt ratio for A-rated sovereigns of 37.8% and up from 50.7% in 2017.

“In our estimates, we include the debt of state-owned investment fund 1Malaysia Development Bhd (1MDB) and RM20bil of funding provided to Lembaga Tabung Haji, the state-owned pilgrimage fund, at the end of last year through an asset-backed sukuk,” it said.

Moody’s cautioned that a higher debt burden would weigh on Malaysia’s debt affordability, particularly because the share of revenue to GDP, at 16.3% in 2018, is likely to remain at or near record lows.

“Interest payments account for 13.3% of revenue, significantly higher than the A-rated median of 4%,” it said.

To recap, on April 10, the government (A3 stable) announced it would provide the RM6.2bil financial aid to Felda.

The announcement followed the release of a White Paper that detailed the company’s deteriorating financial performance, and outlined plans to restore its viability and strengthen its governance practices.

The government plans to spread its aid over seven years. Felda will raise about half of this, which will be backed by government guarantees, while the remainder will come from loans and grants.

Felda was established in 1956 to manage the resettlement of the rural poor and employ them in Malaysia’s palm oil industry, but it has evolved into a financially independent statutory body supporting broader socio-economic development.

Felda’s financial performance has been deteriorating since 2013. In 2017, its losses reached RM4.9bil compared to an average profit of RM700mil in the five years leading up to the listing of its commercial arm, Felda Global Ventures Holdings Bhd (now known as FGV Holdings Bhd), in 2012.

This is attributable to declining operating income from plantations due to lower palm oil prices, financially unviable investment decisions, alleged corruption and weak governance practices.

Felda’s financial difficulties became particularly apparent after the listing of Felda Global Ventures.

Since then, its total liabilities have more than doubled to RM14.4bil from RM6.5bil.

With its cash balance shrinking, Felda is unlikely to be able to meet its debt obligations without the government’s assistance.

It recorded a RM4.6bil loss in earnings before interest and tax in 2017.

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