TM and Tabung Haji in tussle over bond issue
TELEKOM Malaysia Bhd (TM) and Tabung Haji are locking horns over a Rm1bil sukuk ijarah programme raised in a Tm-sponsored issuance where the latter is the largest institutional investor, according to a source.
The continued delays in finalising lease renewals to TM is now elevating the refinancing risk of the sukuk, which could potentially result in huge losses to the sukuk holders, particularly Tabung Haji.
The other sukuk holders are the Employees Provident Fund and Retirement Fund Inc (KWAP)
Tabung Haji has the most to lose, as it took up Rm500mil or the entire unrated portion of tranche C.
The problems arise because the lease agreement on the four properties within the sukuk expired in January 2020, and both TM and the sukuk holders cannot come to an agreement.
The lease agreements have now been extended to Sept 30, where it is hopeful all parties can come to a settlement.
“With less than six months remaining to expected maturity date (of the sukuk) on Jan 15, 2021, refinancing risk is further heightened by the dispute between the tranche A sukuk holders and the issuer’s representatives (directors of Menara ABS) over the appointment of the financial advisor for the transaction,” said RAM Ratings in a report published on June 24.
“These developments, in our view, have severely diminished the effectiveness of the transaction mechanics and amplified refinancing risk. This, together with the already weak office property outlook, aggravated by the Covid-19 crisis, adds to our concerns on the possibility of lease repricing and adverse selection by TM if it chooses to renew its lease on or repurchase only part of the properties,” said RAM.
In 2008, TM raised Rm1bil via an off balance sheet based asset securitisation structure that essentially involves the sale and leaseback of four of its buildings to a special purpose vehicle, Menara ABS Bhd.
The four properties were Menara TM, TM Semarak (formerly known as Menara Celcom), TM Taman Desa and TM Cyberjaya.
The financing programme was advised and lead arranged by Citibank Bhd in 2008.
Under Menara ABS, Rm1bil was raised via three tranches, tranche A of Rm345mil, tranche B of Rm185mil and an unrated tranche C of Rm500mil.
This sukuk has an expected maturity on Jan 15, 2021 and a legal maturity of Jan 15, 2023.
During the tenure of the sukuk issuance, the lease rentals by TM, as the sole tenant, will be utilised to service the sukuk payments and ultimately repay a substantial principal outstanding under the issue.
The two areas of controversy that arise are the lease rates, and TM’S responsibility as the originator and sponsor to the transaction, according to the affected institutional investors.
In 2008 when the transaction was crystallised, the lease rates under the sukuk issuance was around RM6.70 to RM7.70 per square foot, higher than the market rate prevailing in 2008.
Today, against the backdrop of Covid-19 and the fact that there is an office supply glut in the Klang Valley, those lease rates, on commercial terms, are not sustainable.
“TM has conveyed that it is not interested in re-acquiring the said properties and as such, is not responsible for the refinancing exercise. They are also of the view that the new lease rate should be reflective of a discount to the current prevailing market rates,” says the source.
“As a comparison for Menara TM, they are looking at a much lower lease rate of between RM2 and RM4 per square foot, and they are asking for huge discounts for the other three properties too,” says the source.
This, in turn, has negative impacts on the sukuk issue for two reasons – it makes it impossible to refinance the outstanding sukuk issuance and also, the valuation of the underlying properties would have to be revised downwards severely.
Thus, should the bondholders decide to sell the properties, they would have to take a huge loss due to the significantly lower valuation.
“At the point of issuance, institutional investors were asked to assist TM to raise Rm1bil in off balance sheet financing and now 12 years later, TM is telling us it’s not its problem any more and that we should take a haircut!” lamented one of the sukuk holders.
Cash flow
Meanwhile, TM has its own grouse to pick. Under tranche C which is held by Tabung Haji, the yield rate is 10% per annum. So as not to overly burden the cash flow for a 10% yield rate, 7.25% was paid on a year-on-year basis with 2.75% of the yearly yield rate accrued to be deferred and paid on expected maturity.
The said accrual amount alone is
Rm178.75mil.
“I feel the yield of 10% is unfair, even if the tranche was unrated, as the underlying tenant (TM) is a Aaa-rated issuer,” said an institutional investor with no exposure to this deal.
The source adds that the current financial adviser, Newparadigm Capital Markets, is said to be working on several options to avoid a default and ensure all parties’ interest in the transaction is addressed and protected.
“Actually the problem here is that the sukuk holders regard Menara ABS as a pure debt issue especially since it was submitted under the asset-backed securities (ABS) guidelines of the Securities Commission with no equity tranche at all, with TM being the sole originator and sponsor to step up and act responsibly.
“Meanwhile, TM regards it akin to an equity issue where the underlying properties were legally sold and is no longer responsible for the issue, although it was the originator and sponsor to the ABS transaction,” the source says.