Growing strains in debt-laden companies stir concerns about corporate Malaysia

KUALA LUMPUR – The financial woes of two large and prominent local companies are stirring concerns about the overall health of corporate Malaysia – particularly debt-laden publicly listed entities – amid the Covid-19 pandemic.

The problems facing casino tycoon Lim Kok Tay of the Genting Group, Malaysia’s richest businessman, and record losses at national oil company Petroliam Nasional Bhd, or Petronas, the country’s richest entity and its sole Fortune 500 listing, suggest that companies in corporate Malaysia that are heavy on debt and light on cash could be in for some challenging months if the international economic outlook does not pick up.

State support, particularly over the moratorium for corporates and households to service their bank borrowings, will be withdrawn by end-September and that is set to have devastating effects for the wider Malaysian economy.

Mr Manu Bhaskaran, regional strategist of Centennial Group, argues that a number of other factors must come together for policymakers to design a soft landing for an economy already in recession.

“Government support in the form of the moratorium on loans needs to be phased out over time and not done abruptly. Also, banks need to be practical when dealing with borrowers because pulling the plug on one (borrower) can have a dangerous knock-on effect,” he said.

There is a general consensus among economists and bankers that business closures in the services economy will lead to widespread layoffs in the coming months, piling further strains on household debt which, at nearly 83 per cent to gross domestic product, is already among the highest in Asia.

But how the fallout will hit Malaysia’s corporate sector is provoking debate.

The optimistic view among bankers and investment analysts is that the fallout will be limited to the travel, leisure, hospitality, airline and retail sectors and that will contribute to job losses. Malaysia’s overbuilt property sector is also expected to see casualties and could trigger further consolidation of the real estate players.

That much of corporate Malaysia would be spared the aftershocks from the pandemic is grounded on the view that the majority of the country’s publicly listed companies are better capitalised and its banks are in a stronger position than they were during the Asian financial crisis more than two decades ago when regional currencies were hammered down by speculators, sending economies into a tailspin.

To be sure, the majority of Malaysian companies still have some breathing space.

Malaysia’s corporate reporting rules dictate that bank borrowings only crystallise into non-performing loans when interest payments are not serviced for three months. That provides latitude until the end of the year, bankers noted.

But long-term watchers of the Malaysian economy argue that the problems facing Mr Lim’s Genting and the losses at Petronas indicate that the challenges facing both the government and the private sector are hugely different and more daunting this time around.

Mr Lim stunned investors last month when cruise operator Genting Hong Kong, a listed entity in which he personally controls close to 80 per cent, declared that it would suspend all payments to creditors because of serious impairments in its business battered by international lockdowns that forced the closure of its casinos and resorts worldwide.

While Genting’s businesses in Malaysia and Singapore are weathering the rough economic headwinds, analysts fear that the group’s healthier units could be tapped to bail out Genting Hong Kong.

Petronas, which posted a quarterly net loss of RM21 billion (S$6.9 billion) for the period ending June 30 against a profit of RM14.7 billion in the same quarter last year, played a key role in repairing the economy during the crisis in the late 1990s.

It was tapped to bail out large Malaysian companies, including the debt-laden Malaysian International Shipping Corp that was controlled by the eldest son of then Prime Minister Mahathir Mohamad and the country’s beleaguered national car company Proton.

The national oil company also spearheaded the development of the country’s administrative capital Putrajaya during the crisis years which was vital in boosting a slumping construction sector.

Economists noted that the government’s reliance on Petronas to provide financial lifelines for troubled companies and the general economy will be limited this time round.

The massive debt of other large state-owned investment companies are also likely to limit the government’s ability to carry out bailouts.

Leading the pack is Khazanah Holdings, the state-owned strategic fund fashioned along the lines of Singapore’s Temasek, that owns commanding stakes in many of the country’s largest companies, such as power utility Tenaga Nasional, wireless telco operator Axiata Group, telecommunications giant Telekom Malaysia and property group UEM Sunrise. Companies in the Khazanah stable had a net debt position of RM57.6 billion as at the end of March this year, according to published accounts.

Other state-owned investment entities with commanding interests in public listed entities are Permodalan Nasional Bhd (PNB) and the country’s armed forces pension fund or Lembaga Tabung Angkatan Tentera (LTAT).

PNB groups of companies, which include conglomerate Sime Darby, auto and engineering giant UMW and companies involved in pharmaceuticals, property development and manufacturing posted a combined net debt of RM23.8 billion.

The net debt position of LTAT companies, including diversified Boustead Group, stood at RM7.8 billion.

Senior government officials acknowledge that the debt of many government-linked entities are large because of corporate expansion over the last decade. But they remain upbeat that the strains will not lead to any major fallout.

A senior Khazanah official noted that the state-owned investment giant would have to adopt a slightly different approach when dealing with any fallout from the economic crisis, but was pushing ahead with consolidation in the sectors that it dominates.

“After the expansion phase, it is now time for some consolidation and so there is room for deals between GLCs,” said the official.

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