Integrity Of Bond Markets & Government's Implicit Guarantee

The freezing of payments to bondholders by Port Klang Authority has been 'welcomed' by many critics. However, the other side of the coin will have to be considered as well. There are 4 bonds outstanding which totals to RM2.8bil and there is currently a technical default due to non-payment into the DSR account.

On 30th July, SPV will have RM100mil maturity which is part of the RM600mil which the PKA wihtheld on 30th June. The general public only heard of the side where the project was a failure and all the "leakages".

There are institutional investors involved as well, and they are bondholders. Foreign investors holds about 45% of the total invested. The integrity of the Malaysian bond market has to be maintained. Yes, you can go on with the deliberations, and even if PKA wants to freeze payments, there should be a clear message being sent to the bondholders. There are already repercussions in the market place. There are questions about the government's implicit and explicit guarantee. Bank Negara will have to step in to clear the air. The unresolved situation may trigger concerns across all other government explicit and implicit guarantee on any kind of assets, and naturally a run on the ringgit.

In our pursuit for transparency and the truth, we must also be wary of the greater implications on the integrity of financial markets. Sober heads must prevail.

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By Neville Spykerman / Malaysian Insider / 30 June 2009

PORT KLANG, June 30 — The Port Klang Authority (PKA) will withhold further payments due to Port Klang Free Zone (PKFZ) turnkey contractor Kuala Dimensi Sdn Bhd (KDSB) pending the completion of a full review by a task force set up on June 10. The payments, in four parts, amount to RM660 million.

PKA chairman Datuk Lee Hwa Beng said the decision to withhold payment was made by PKA’s board, which is bracing itself for potential lawsuits which may be soon filed in retaliation by KDSB. Lee said they plan to fight any lawsuits.

“We will wait for the outcome of litigation which will determine PKA’s true liability,” he said, adding that the board was acting in the best interest of the PKA.

The action by PKA’s board comes in the wake of calls yesterday by the DAP’s Lim Guan Eng for the Transport Ministry to stop payments to KDSB or any other parties, until the culprits responsible for the scandal are arrested and charged in court. The development cost for PKFZ may spiral up to a staggering RM12.5 billion, according to a PricewaterhouseCoopers audit report, from an initial cost of less than RM2 billion but to date no one has been held accountable.

The RM660 billion owed to KDSB is payable in four parts to special purpose vehicles created by KDSB. Among them are Transhipment Megahub Berhad, Valid Venture Berhad and Free Zone Capital. A total of RM330 million is due to be paid to KDSB by today while a further RM300 million will be due in July. Lee said that PKA, under the instructions of the Transport Ministry, had commissioned a task force to investigate the PKFZ project and had only recently started the process of gathering information.

“The full recommendations of the taskforce are expected to be submitted to the PKA and the ministry in August,” said Lee.

Lee, who was flanked by two lawyers at the PKA office today, was very cautious about the words he used during the press conference and made clear he wanted sidestep any potential lawsuits.

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LATEST UPDATE & DECISION REVERSAL

PUTRAJAYA: The Port Klang Authority board has agreed to release payment due to trustees for bondholders after considering their appeal and the stand of the Finance Ministry.

PKA chairman Datuk Lee Hwa Beng said the board made this decision at its meeting to consider the appeal yesterday.

"The appeal letter dated July 3, 2009, described the background of the issuances of private-debt securities, comprising bonds and commercial papers (CP) as well as medium-term notes (MTN), by the four special-purpose vehicles.

"It also spelt out the consequences of non-payment and the possibility of the trustees acting upon the directions of the bondholders and CP/MTN holders enforcing the security charged."

Lee said PKA had also received instructions from the ministry that the board be mindful of the implications that might affect the confidence of local and foreign investors in the private-debt securities market.
He said the payment was to be made without prejudice, with reservation of the rights basis and without an admission of liability.

"PKA will, however, not waver from its earlier commitment to seek legal remedies and take action to determine its true liabilities and rights."

The board had on June 30 deferred RM660 million payment to Kuala Dimensi, the turnkey contractor for the Port Klang Free Zone project, pending the completion of investigation by its special task force.

PKA needs to pay Kuala Dimensi RM660 million in four instalments from last month to this month.

The first sum of RM130 million should be paid on or before June 30 under the sale- and-purchase agreement signed on Nov 12, 2002.

Another RM230 million was to be paid on or before June 30 under the development agreement dated March 27, 2004.

PKA has to pay RM150 million this month under the supplemental agreement for additional development works dated Nov 30, 2005, and another RM150 million also in July under supplemental agreement for new additional development works dated April 26, 2006.


p/s photo: Park Chae Rim