Talam’s debt recovery exercise revisited
Dr Dzulkefly Ahmad, (Harakahdaily.net)
05 July 2012
[The following was first published in April 2010, and is being republished here in the wake of the recent accusations against the Selangor state government. -Ed.] Lest you’ve missed this ‘essay’ especially for YB Labis and his Umno’s counterparts, avail yourself the opportunity to be ‘enlightened’ by my little effort back in April 2010. – MP for Kuala Selangor.
Granted, the decision of the Selangor state government to recover the debts owed by Talam Corp Bhd to state subsidiaries of Kumpulan Hartanah Selangor Berhad (KHSB), Universiti Industri Selangor (PIYSB) and Permodalan Negeri Selangor Berhad (PNSB), has led to a hue and cry by the public. Not quite appreciative of the actual mechanics, the anxiety by lay public was quite understandable.
Arguably, reasonable and innocent questions were rife, like why borrow RM391 millions to recover a debt of RM391 and could it not be better spent in other things for the people than to save Talam.
Little wonder why the State Government of Selangor was accused of bailing out Talam, a private township developer, of a crime and an abominable ‘sin’, all Pakatan parties pledged and waged war against, in the last General Election.
Right: Talam directors
In consonant with Pakatan open government policy of accountability and transparency, this article attempts at revisiting and explaining the rationale while hopefully simplifying the entire mechanics of this debt-recovery exercise. Unlike typical bail-outs conducted by the BN government where money were actually injected or handed out to ailing private or privatized companies, like RM1.6 billions to IWK of Berjaya Group, RM10.3billion to MAS of Naluri Bhd or RM6billions to Putra/Star LRT, this debt-restructuring exercise conducted by the state government of Pakatan in Selangor didn’t handout any money to Talam Corporation Berhad.
A more recent example (December 2009) smacked of a downright bail-out is exemplified by the RM320m interest free, unsecured, back-loaded 20-year loan facility that was given to SYABAS, the concessionaire in water distribution in the state of Selangor, now in great financial stress.
In contrast, let it be again stressed that Talam Corp Bhd didn’t receive a single cent out of this debt-recovery exercise. Besides, neither did the state government use the tax-payers’ money as alluded by many nor did the state subsidiaries to whom Talam originally owed, received any cash injections as a result of this exercise. Umno and the BN have a penchant for that i.e. failures are nationalized and profits privatized, but the Pakatan’s states have to, not only do it better but differently. Simply put, all these presumptions were unfounded and the allegations made, including by academics, extremely unfortunate.
To recapitulate, Maxisegar Sdn Bhd (MSSB) in 2001, a wholly-owned subsidiary of Talam Corporation Berhad, entered into a contract with the State Government of Selangor to finance and construct the Main Campus of UNISEL on 572.16 acres of land at Berjuntai Bestari, Selangor for a total development cost of RM750 million.
In consideration of the cost incurred, the State Government of Selangor had alienated three parcels of leasehold land to MSSB as in Batang Berjuntai (3000 acres valued at RM345million), Taman Puncak Jalil (801 acres valued at RM337.5million) and Suajana Damansara (110 acres valued at RM67.5 million).
MSSB defaulted in the final delivery of the UNISEL project. In its 2009 annual report, Talam said it had been unable to meet its financial obligation to bear the development and maintenance costs of about RM134 million in the Universiti Industri Selangor (Unisel) project.
Meanwhile Talam Corp Bhd couldn’t also deliver and fulfil its financial obligation in several real estate joint-venture development projects with the above-mentioned state subsidiaries. All these debts however only came to be noticed and uncovered by auditors appointed by the Pakatan’s State Government of Selangor.
The debts were in most cases previously neither fully recognised nor well recorded in the books of the state subsidiaries as the creditor. That is at best irresponsible and scandalous at worst. The previous state government and the state subsidiaries concerned must be put to task accordingly.
To make matter worse for the State Government, Talam Corp Bhd has been classified as an affected company under PN17 since Sept 1, 2006, for failing to pay off its outstanding loans and bond obligations while its auditors were unable to provide an opinion on its results for its FY2006 ended Jan 31.
Talam’s executive director, Chua Kim Lan said Talam was targeting to complete its regularisation plan by May this year, for the company to have its Practice Note 17 status removed. Chua said after completing the regularisation plan, the debt level of Talam will be reduced from RM3 billion to RM300 million.
Talam is looking at disposing of about 3,000 acres (1,214ha) of land from its current landbank of 7,000 acres. The largest tract of land to be disposed of would come from the company’s Bandar Bukit Beruntung development. Talam’s current projects alone and in joint-venture with others, like IJM Corp Bhd etc, have a combined gross development value of more than RM1.4 billion as claimed by the Executive Director.
Talam has considerable land-bank for development in prime areas in the Klang Valley such as Ampang, Sepang, Puchong, Bukit Jalil and Rawang.
According to Bloomberg data, the net tangible asset (NTA) per share for Talam is 18 sen, while the share was trading at 9.5 sen last Thursday [April 15, 2010 - Ed.]. Talam’s landbank, according to its 2009 annual report, amounted to 5,792 acres as at Jan 31, 2009. The value on the books came up to RM1.13 billion, including development costs.
In other words, the state government runs a risk of writing off these as bad debts if no proper action is taken.
The overarching objective of the debt recovery exercise is for the state government to take over the ‘ownership’ of the debt, as it is in a better position to secure the receivables. The rationale is to ensure that Talam Corp Bhd gives a higher priority to its debt (to the state), incurred over the last decade, ahead of its other creditors. “Previously, we (the state) were at the lower rung of creditors, now we want to be at the top rung,” quipped the Mentri Besar.
In a smart maneuver of what is known as ‘round-tripping’ in the financial discipline, the state government has now taken over the debt from the state subsidiaries and currently in a better position to squeeze Talam directly as to fulfill its debt obligation.
The procedures could be summarized as follow (as schematized in the diagram):
1. Confirmation of Debts. An amount of RM392millions was agreed upon and agreement signed by Talam and the various state subsidiaries namely KHSB, PIYSB and PNSB to confirm the debts owed by Talam.
2. Assignment of Debts Agreement. Talam and the state subsidiaries later undertook an agreement to assign the debt to the state government. The state government of Selangor now takes full ownership and responsibilty of recovering the Talam’s debt.
3. Receivable Purchase Agreement. The State Government initiated the move by firstly getting the Selangor Industrial Corporation (SIC) to purchase the debt owed by Talam, from the State Government, by paying a cash amount of RM392 million to the latter. In order to execute the purchase, the SIC had earlier made a cash borrowing from a bank (the CIMB) of an equivalent amount of RM392 million. That is the first Receivable Purchase Agreement in placed.
4. Receivable Purchase Agreement. Acting merely as a ‘conduit’ or a special purpose vehicle for the whole exercise, the SIC now sells this debt to the Menteri Besar’s Incorporated (MBI), an investment arm of the State Government. MBI is to receive a grant from the State Government an equivalent amount of RM392million for payment to be made to SIC.
Since the State Government of Selangor did not have that allocation in the State’s budget for 2009, the meeting of the Selangor State Exco on the 2 November witnessed the tabling, debate and decision to consent MBI the grant of RM392 million from the State Government.
A supplementary supply (budget) enactment was later tabled and endorsed by the State Legislative Assembly on the 9 November for the grant of RM392 million to be allocated to MBI, in the light of executing and realising the objective of the Debt-Restructuring exercise.
Subsequently MBI then buys over the debt from SIC signing the second Receivable Purchase Agreement and paying a cash payment of RM392 million on the 10 November. With the cash payment received from MBI, SIC pays off the borrowing they did to inititiate the whole cascade of the debt-recovery exercise.
The ‘roundtripping’ finishes with SIC paying off its borrowing and the entire cost sustained by the State Government only pertains to the legal and financial cost of borrowing undertaken by SIC. And amount of RM140,000 (or RM70,000 a day) was bandied around without this writer an ability to ascertain its actual cost. Legal and financal consulting were taken care off, as it was handled in-house i.e using expertise within the State Administrative staffs including that of the good office of the Menteri Besar.
With the procedures clearly spelt out, the State Government of Selangor could now placate all grouses and address the various accusations once levelled against them. The goverment neither used the tax-payers’ money to pay-off the debts of Talam in a typical bail-out of saving a crony nor were the state subsidiaries compensated any cash after having committed the various far-from-satisfactory -jobs in their joint-venture endeavours with Talam.
Similarly the cynical questions from the academics as to who benefited from the exercise and why did the state government gave the debt buy-over utmost importance are now self evident. Already there is early success to prove the claim of the state government that their business decision is both sound and economically viable.
The former MB of Selangor and perhaps the entire Najib’s administration must be cursing themselves for not resorting to such clean and smart financial solutions, arguably more befitting with and in adherent to their “Rakyat-First and Performace Now” rhetoric. But as they say it, ‘you could only give what you have’. And frankly they don’t have it. Slogan without substance only breeds contempt and distrust.
With the last step of the procedures in place, the objective of the State Government taking over the receivables from its subsidiaries via MBI, is now achieved. MBI, an investment arm of the State Government is well positioned to now press for Talam to fulfil its debts obligation or faces the prospects of foreclosure and liquidation on its assets and properties if it failed to pay up by then. On 10 Nov, Tan Sri Khalid Ibrahim gave Talam three months to settle the debt, incurred in connection with several properties.
Very recently, the Selangor MB, Tan Sri Khalid Ibrahim proved his detractors wrong by successfully collecting more than RM50 million in cash and assets from developer Talam Corp Bhd. “We have so far collected more than RM50 million and we hope to collect the rest within the year,” Khalid told The Malaysian Insider.
The MBI and the State Government will eventually silent all critiques when a substantial debt owing by Talam Corp Berhad is back in the consolidated fund of the state. The onus is now on the Pakatan’s state government to fully realise their claim of competency, accountability and transparency in matters of fiscal governance and fiduciary role.
That shouldn’t be difficult for the MB and his Exco, insha Allah.