The CDRC is pleased that the debt restructuring scheme for Renong Group can be carried out without any financial support from the Government. This is consistent with the Government’s policies where private sector solutions are applied for problems faced by Malaysian companies.

It is important to the CDRC that the restructuring of the Renong Group is implemented on a transparent basis. This in turn should enhance market stability and further boost the confidence level of investors, both local and foreign, in our capital market. The notion of fair play is paramount in restructuring exercises undertaken by the CDRC. This is reflected in the equal treatment of both local and foreign lenders in the CDRC’s Proposal. Foreign investors can safely invest in Malaysia and foreign lenders can lend to Malaysian companies with the assurance that Malaysian regulators will treat local and foreign parties equally without any discrimination.

Background

In December 1998, the Government referred the original debt restructuring plans of Renong Berhad (Renong) and United Engineers (M) Berhad (UEM), jointly referred here as the "Renong Group", to the Corporate Debt Restructuring Committee (CDRC). These original proposals require some form of government financial support.

The CDRC is an initiative of the Government, established to act as a mediator between private sector companies and financial institutions for the purpose of restructuring distressed corporates. The broad objectives set for the CDRC are:

• To minimise losses to creditors, shareholders and other stakeholders through voluntary coordinated workouts;
• Preserve viable businesses suffering during the current economic conditions and hence jobs; and
• To implement a comprehensive and best practice framework for debt restructuring.

The first action of the CDRC was to review all the previous restructuring proposals prepared by Renong Berhad and its financial adviser, Credit Suisse First Boston (CSFB). This due diligence was to identify the status of the Renong Group with respect to its assets, liabilities and cash flows. Next, the CDRC met up separately with the Renong Group’s management and creditors to clarify on issues affecting the parties. This starting point allowed the CDRC to understand the interest of all parties in formulating a new debt restructuring plan with the assistance of Renong Group and its advisers to meet the following objectives:

• To offer all Renong and UEM creditors settlement of their claims in full;
• To rely solely on the Renong Group’s assets for settlement of claims;
• To avoid a distress sale of Group assets at current, depressed valuations; and
• To ensure that Renong and UEM remain as financially viable going concerns, and are well positioned to take advantage and to benefit from the anticipated recovery in the nation’s economy.

CDRC’s Proposal

The centrepiece of the debt restructuring proposal revolves around Projek Lebuhraya Utara-Selatan Berhad (PLUS), a 100% subsidiary of UEM. PLUS is the strongest company in the Group based on the CDRC’s review and would have the ability to raise the necessary funds. Broadly, the scheme will see PLUS raising a new bond issue and the bonds/proceeds will be utilised to settle the claims of Renong’s and UEM’s creditors ("CDRC’s Proposal" or "Proposal"). The bonds will be zero coupon with a seven(7) year maturity and priced to have a yield of 10% per annum, which is attractive compared to the prevailing interest rate and market conditions.

Issuance of PLUS Bonds

The Proposal requires PLUS to raise approximately RM8.4 billion, based on present day value, via a new bond issue ("PLUS Bonds") to settle the claims of Renong’s (RM5.4 billion) and UEM’s (RM3.0 billion) creditors. Approximately RM7 billion will be offered for cash, while the remaining RM1.4 billion will be used as part settlement of existing liabilities.

PLUS will lend RM3.0 billion cash to UEM against a pledge by UEM of listed shares to PLUS. UEM will use the RM3.0 billion cash towards full settlement of its outstanding debts except for the RM179 million of Irredeemable Convertible Unsecured Loan Stocks (ICULS) which in the Proposal would be restructured through adjustment of conversion terms.

Renong will receive RM5.4 billion from PLUS via the following:-

(i) Renong to borrow RM4.0 billion in cash and RM0.4 billion in PLUS Bonds from PLUS against a pledge by Renong of its assets to PLUS; and

(ii) Renong will receive RM1.0 billion in PLUS Bonds arising from the redemption of the Redeemable Convertible Cumulative Preference Shares (RCCPS) that Renong owns.

Renong will utilise RM2.5 billion cash towards the settlement in full of all Renong’s secured outstanding debts, while RM1.5 billion cash will be used to settle half of Renong’s unsecured outstanding debts. The remaining RM1.4 billion Renong’s unsecured outstanding debts, with the exception of the outstanding RM252 million ICULS, will be settled by an exchange to PLUS Bonds.

Solution for ICULS

It is intended that the outstanding claim under Renong’s ICULS of RM252 million will not be repaid but restructured through adjustment of conversion terms. This is on the basis that the ICULS were meant to be an irredeemable instrument and to be converted into equity. Meanwhile, Renong also intends to revise the conversion terms of its existing warrants at a later stage as part of this financial restructuring exercise.

Similarly for UEM, the outstanding claim under UEM’s ICULS of RM179 million will not be repaid but be restructured through adjustment of conversion terms.

Repayment to PLUS

The CDRC’s Proposal requires both Renong and UEM to repay PLUS. The second stage of the CDRC’s Proposal is to maximise the value of assets under the Renong Group to meet this future obligation. Renong will undertake a structured asset disposal programme with a view to enhance the value of its existing asset portfolio in order to repay its obligation to PLUS. Both the CDRC and management of Renong are confident that significant value can be extracted from Renong’s asset portfolio over the coming years, and that this will be sufficient to meet its obligation to PLUS.

For UEM, the repayment to PLUS will be sourced from future profits of its other assets and from selective asset disposals. Both the CDRC and management of UEM are confident that UEM would be able to meet its obligation using cash flow from its other assets and proceeds raised from asset disposals.

Protection of PLUS

While PLUS is required to take on additional debts of RM8.4 billion based on present day value of PLUS Bonds, such additional debts will be backed by the undertaking of Renong and UEM to repay PLUS in full as described earlier. In addition, Renong will pledge its assets via a debenture to PLUS as consideration for the scheme. UEM will also pledge listed shares via a debenture to PLUS as security.

Other Group Companies

The CDRC’s Proposal does not address the liabilities at specific Renong’s and UEM’s subsidiary and associate companies. These liabilities will be addressed separately. The Renong Group is confident that, having settled the liabilities currently due at the holding company levels, it will be able to focus more effectively on managing the liabilities of its subsidiary and associate companies.

Benefits of CDRC’s Proposal

The CDRC and Renong Group believe that the CDRC’s Proposal is in the best interests of the creditors and shareholders of Renong and UEM.

All creditors’ claims will be settled in full. All of UEM’s creditors and all of Renong’s secured creditors will receive repayment in cash, while Renong’s unsecured creditors will receive 50% of the repayment in cash with the balance 50% in PLUS Bonds.

From Renong’s point of view, the CDRC’s Proposal avoids the immediate liquidation of Renong, in which case Renong’s assets would have to be sold at current depressed market valuations, raising insufficient proceeds to repay all of its liabilities. Instead, the CDRC’s Proposal enables Renong to implement a programme to realise more fully the value of its investments, and which captures the upside potential of the anticipated national economic recovery. This should put Renong in a better position to service its liabilities and to return value to shareholders.

From UEM’s point of view, the CDRC’s Proposal avoids the sale of strategic assets, such as PLUS, under current depressed market conditions. The Proposal enables stakeholders to realise greater value by firstly benefitting from the positive effects that the anticipated national economic recovery will have on UEM’s key projects and construction-related businesses, and secondly through the retention of PLUS, UEM’s most valuable asset.

Overall, the CDRC’s Proposal will have immense benefit to the economy, especially the banking sector. The successful restructuring will ease non-performing loans in banks, thereby improving the overall financial health of the system. These factors should translate to improve confidence in Malaysia. The Proposal also does not impose additional burden on the Government as no Government’s financial support is required.

Timing for Completion

The CDRC’s Proposal will be subject to approvals of PLUS’s project lenders and holders of PLUS Serial Bonds, Renong Group’s creditors and shareholders as well as all relevant authorities. Formal documentation of the CDRC’s Proposal is currently underway, and management is confident that the plan can be completed by the third quarter of 1999.

Corporate Debt Restructuring Committee