SCwatch


MAS’ BONDS ARE NOT DEEMED AS BORROWINGS : LEAVING THE PENSION FUNDS SEEMINGLY CONNED?

It was not really surprising when MAS announced its second quarter results with another loss in the region of RM350m.

It’s still bleeding and there is no sign of it stopping in the foreseeable future.

One of the main reason is the fixed overheads including maintaining over 20,000 employees without corresponding returns in terms of revenue generated or value add provided to the organisation.

It therefore begs the question as to what kind of returns MAS’ management expects in the following year or so……with the RM2.5 billion worth of ‘perpetual bonds’ it has issued or plans to issue.

To date RM1.0 billion has been issued based on its second quarter results.

The worry (I’ll tell you later why  we should worry) is that the monies raised from the bonds will only be used to keep the company afloat i.e. without investing it to generate profits for MAS.

Hey, don’t try to kid us with the A380 super jumbo jets which MAS had taken delivery of……as the saviour for MAS!

They were ordered years ago premised on projections based on a wish and a hope…..and may find utilisation of these planes scarce compared to its more efficient competitors!

Which brings me back to the point of the bonds – if the proceeds are just to pay for its abnormally high overheads (in order to evade the political repercussions of not paying!), it may explain why the bonds have features that do not oblige MAS to pay interest on the bonds NOR to repay the principal!!

What kind of bond is this, you may ask?

Well, as long MAS gets the money, who cares?

The one who cares will be the one coming out with the money!

And who are they?

The country’ pension funds!

The bonds’ special features of not being obliged to pay interests or principal may also explain why the bonds are NOT deemed borrowings in MAS’ books.

It may also ‘justify’ the bonds not requiring any rating!

They are effectively deemed to be share capital in  nature.

Why the obsession not to have the bond classified as borrowings?

Well, there is this indicator used by financial analysts the world over called “Gearing Ratio” which effectively measures the level of borrowings compared to your shareholders funds.

The higher the ratio, the higher the risk to the company.

Therefore, what is supposed to be part of the numerator (read: borrowings) now becomes part of the denominator (read: share capital)!

That way, the gearing ratio of MAS looks better than it really is…….through this window dressing exercise vide the use of fancy words in the Terms of Reference when issuing this bond.

Which comes to why we should worry about this whole exercise.

Granted, this kind of bond has been issued in other countries…….but the companies that issue them are financially strong and investors queue up to invest in their shares and financial instruments.

This is inspite of the remote risk of these ‘blue chips’ not paying interest or repaying principal … the investors are prepared to take that risk to enable these companies to add a few more brownie points to their existing AAA status!

Not so for MAS, our dear old Malaysian Airlines!

Many have claimed that MAS is technically insolvent……and it’s financials seem to support such an assertion.

So the question is why would anyone want to invest in the kind of bonds that a struggling company like MAS has issued……knowing full well that MAS is not obliged to pay interests nor are they obliged to repay the principal?

That’s because the common factor here is the government which effectively controls MAS and also the pension funds!

The government is using the retirement savings of the people to keep afloat a company that is struggling to compete with its foreign competitors (note: the local market has been lost to Air Asia).

And the decision to do so appear purely political……i.e. to enhance standing of UMNO…..the costs of which are borne by the people’s savings in the pension funds!

Is this acceptable?

Shouldn’t the bonds issued by MAS be subscribed by Tajuddin Ramli and his cohorts, under the same terms…..that no interest is to be paid nor principal to be re-paid?


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