The RM1.1bil question

BAILOUTS do happen every now and then. In 2008-2009, during the global financial crisis (GFC), the US government bailed out General Motors Co (GM) on the basis that it was too big to fail, given its interconnectedness within the United States and global economies.

A collapse of GM would have had a domino effect on many other sectors in the United States. That justified the bailout.

Then came bank bailouts following the GFC, aimed at preventing a collapse of the financial system. They included the Bank of America in the United States and the United Kingdom’s Royal Bank of Scotland.

The “bailout” theme is now the talk of the town in Malaysia, after the Finance Ministry (MoF), via its special-purpose vehicle Malaysia Development Holding Sdn Bhd, said it was going to invest RM1.1bil to subscribe to Sapura Energy Bhd’s redeemable convertible loan stocks (RCLS).

The monies will be used specifically to settle the oil and gas (O&G) service provider’s outstanding payments to more than 2,000 vendors, the majority of which are bumiputra small and medium enterprises (SMEs).

But why isn’t Sapura Energy’s major shareholder, Permodalan Nasional Bhd (PNB), forking out the funds?

It’s likely that PNB, having invested RM2.67bil just six years ago into the company, faces limitations due to the single investment risk exposure.

Following an outcry, PNB issued an eight-point statement late Wednesday, claiming that the government’s capital injection is an investment, not a bailout.

PNB reiterated that the funds will be solely used to repay the vendors, which employ about 59,000 workers in the local O&G industry.

Without the vendors, PNB argued, the work would otherwise have to be outsourced to foreign providers, resulting in payments flowing out of the country.

Additionally, the investment aims to prevent Sapura Energy’s liquidation and the forced sale of critical national O&G assets, both domestically and globally.

PNB stated that the investment aligns with practices implemented by other governments to safeguard their strategic industries, citing similar government-backed investments in Singapore’s Sembcorp Marine and South Korea’s Daewoo Shipbuilding & Marine Engineering (now rebranded as Hanwha Ocean Co Ltd) as examples.

Regardless, the money going into Sapura Energy from the MoF involves the use of taxpayers’ money – funds that could otherwise be used for building hospitals, schools or roads for the benefit of the public.

Prime Minister Datuk Seri Anwar Ibrahim, a vocal critic of government bailouts, said on Thursday that the fund is provided in the form of a capital loan, with the expectation that Sapura Energy’s new management will repay it once the company recovers.

A forensic audit conducted by Ernst & Young ensured transparency before the decision was made, which, as Anwar pointed out, was “not an easy one.”

However, some argue that there’s no guarantee Sapura Energy, which has been under Practice Note 17 (PN17) status since March 2022 , will be able to repay the loan. Even so, it may take years given its present financial condition.

The government has the option to convert the loan into equity, but that would only be beneficial if the company’s financial situation improves.

Sapura Energy once commanded a market cap of RM30bil during its aggressive expansion in 2013-2014.

Its woes began when oil prices fell, making it difficult for the group to maintain profitability and service its debts, leading to a series of asset sales and restructuring efforts.

Moving forward, the key is to focus on strong governance and effective execution.

In the cases of Sembcorp Marine and Daewoo Shipbuilding, their governments framed the assistance not as a traditional bailout but as part of a broader effort to restructure and reform their industries.

Locally, the O&G services sector is highly fragmented and has been ripe for consolidation for the longest time.

If left purely to market forces, many of these companies would likely be forced into a healthy consolidation.

One wonders whether the MoF’s capital injection into Sapura Energy is actually preventing that from happening.

Countries like Norway, with similar O&G resources to Malaysia, have far fewer service providers.