Update on Litrak's Capital Repayment!

Blogged earlier: Christmas Is Indeed Here for Litrak!

I wrote the following:

Which brings me to this other issue on Litrak's capital repayment. I blogged on this on March 18th 2008. See Litrak may return RM1 per share!

My grave concern was how come Aseambankers research team was bang on the money on this capital repayment issue?

• According to a research note by Aseambankers, Litrak has a total debt of RM819 million as at December 2007. Assuming the entire sukuk programme was drawn up, analysts estimated that Litrak would have a cash surplus of RM726 million, which could potentially be returned to shareholders.
  
  “However, we believe that the maximum surplus amount of RM726 million may not be returned to shareholders in full, with some to be kept for future investments. Ultimately, a capital repayment of at least RM1 per share (or RM492 million in total) is more likely,” it said

Embarking on a sukuk program to incur more debts and then to give a huge chunk back to its shareholders requires extreme imagination!

So why and how did Aseambankers come out with this incredible and insane suggestion in the first place?

Did they know?

Did they?

I was alerted by Seng on an interesting fact:

LINGKARAN TRANS KOTA HOLDINGS BERHAD (“LITRAK” OR THE “COMPANY”) (I) PROPOSED CASH DISTRIBUTION OF RM1.00 TO THE SHAREHOLDERS OF LITRAK BY WAY OF CAPITAL REPAYMENT ON THE BASIS OF RM0.93 CASH (“PROPOSED CAPITAL REPAYMENT”) AND SINGLE TIER INTERIM DIVIDEND OF SEVEN (7) SEN CASH FOR EVERY ONE (1) EXISTING ORDINARY SHARE OF RM1.00 EACH HELD IN LITRAK; AND (II) PROPOSED AMENDMENT TO THE MEMORANDUM OF ASSOCIATION OF LITRAK PURSUANT TO THE PROPOSED CAPITAL REPAYMENT

And if you open that link you will see the following statement:

• On behalf of the Board of Directors of Litrak (“Board”), Aseambankers Malaysia Berhad (“Aseambankers”) is pleased to announce that the Company wishes to distribute RM1.00 cash for every one (1) existing ordinary share of RM1.00 each to the shareholders of Litrak by way of the following:

Now how about that??!!!!!!!!!!!!!!

Aseambankers is the banker!!!!!!!!!!!!!!!!!

How now my dearest MooMooCow?

Is this simply disgusting?

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Update:

I got a copy of Aseambankers report just now.

And this is what they wrote:

• As expected! Litrak’s proposed capital repayment of 93sen per share is within expectations. The capital repayment proposal came hot on the heels of a debt restructuring exercise approved by the authorities early this month – a Sukuk Issuance Programme to raise up to RM1.545b to refinance existing debts (RM819m as at Dec 07). Litrak will distribute a maximum of RM462m cash based on its current paid-up of 492m shares and assuming all 4.7m ESOS are exercised. In addition, Litrak will also pay a 7sen single tier interim dividend for FY08 (ex-date not fixed), lifting immediate payout to RM1.00. This is Litrak’s second capital repayment after an earlier 25sen per share in May 2006.

As expected???

My oh my!

How????

Christmas Is Indeed Here for Litrak!

Read the following article: Windfall for Litrak shareholders

• SHAREHOLDERS of Lingkaran Trans Kota Holdings Bhd (Litrak) will get at least a RM462 million windfall under the company's capital repayment and dividend plans announced yesterday.
  
  Shareholders will be paid RM1 for every share they have, in the form of 93 sen cash under a capital repayment, and another seven sen in a single-tier interim dividend for the year ended March 2008.
  
  The 93 sen per share repayment - involving a payout of up to RM462 million - will be done via a reduction of the company's share capital and share premium.
  
  "(Consequently) the share capital and share premium account will be reduced by up to RM397.42 million and RM64.58 million respectively," Litrak said in a statement to Bursa Malaysia.
  
  Litrak said the capital repayment reflects its continuous effort to achieve an efficient capital structure and to reward its shareholders.
  
  "The proposal is expected to enhance the consolidated return on equity of the Litrak Group, which in turn is expected to have a positive impact on shareholders' value."
  
  However, the capital repayment will reduce its interest income.
  
  "Based on the average gross return on short-term deposits of three per cent per annum, the proposal is expected to result in a decrease of interest income by RM13.86 million per annum," it said.
  
  The exercise is expected to be completed by the third quarter of 2008.

Oh no!

Another sad day for corporate Malaysia!

I had blogged before on this issue: Incurring Debts to Return to Shareholders

Here are my reasonings again.

• In this example, one needs to look at the justifications of raising debts just to return to the shareholders.
  
  I am not saying that all debts are negative. Some debts are indeed productive if the company manages to use the debt as a means to finance capital expenditure exercises that creates the opportunity for the company to generate more returns in the future.
  
  However, not all debts are good. And the more debts issued by a firm, the higher the risk premium for the company.
  
  And in this case where debts is incurred to repay shareholders, these debts incurred does not generate any returns for the company for it is GIVEN back to the shareholders. And sooner rather later, these debts would have to be repaid, which means future profits generated by the company would have to be used to repay these debts and not forgetting the interest cost.
  
  Clearly this is but one sure insane and ludicrous manner to manage a company.

Which brings me to this other issue on Litrak's capital repayment. I blogged on this on March 18th 2008. See Litrak may return RM1 per share!

My grave concern was how come Aseambankers research team was bang on the money on this capital repayment issue?

• According to a research note by Aseambankers, Litrak has a total debt of RM819 million as at December 2007. Assuming the entire sukuk programme was drawn up, analysts estimated that Litrak would have a cash surplus of RM726 million, which could potentially be returned to shareholders.
  
  “However, we believe that the maximum surplus amount of RM726 million may not be returned to shareholders in full, with some to be kept for future investments. Ultimately, a capital repayment of at least RM1 per share (or RM492 million in total) is more likely,” it said

Embarking on a sukuk program to incur more debts and then to give a huge chunk back to its shareholders requires extreme imagination!

So why and how did Aseambankers come out with this incredible and insane suggestion in the first place?

Did they know?

Did they?

Sigh!

Another sad day for corporate Malaysia!

On one hand, I was overjoyed reading the case on Iris. However, this Litrak incident has taken everything away!

Sigh!

Incurring Debts to Return to Shareholders

Blogged previously: Litrak may return RM1 per share!

The Great Game said...

• Well, no offence, but at least in overseas market, this is actually very common for mature infrastructure assets which have demonstrated track record to gear up to repatriate the surplus to shareholders. There are some new products like accredited swaps which proliferates this type of transaction. It simply makes no sense for a asset with a says 30 years concession life to have a 15 years debt tenure -- ideally, it should match it with a 30 years tail debt tenure, if there is enough depth in the debt market. After all, this is an asset-based company, not much upside for shareholders can be gained from operational improvement, if not from financial engineering.

Here are some of my thoughts again on this issue.

Firstly, the issue of what's practiced in the overseas market. In my opinion, just because it is practiced in the overseas market does not mean that companies here should follow. For me, companies here should emulate all the good examples set and should discard all the bad practices made!

In this example, one needs to look at the justifications of raising debts just to return to the shareholders.

I am not saying that all debts are negative. Some debts are indeed productive if the company manages to use the debt as a means to finance capital expenditure exercises that creates the opportunity for the company to generate more returns in the future.

However, not all debts are good. And the more debts issued by a firm, the higher the risk premium for the company.

And in this case where debts is incurred to repay shareholders, these debts incurred does not generate any returns for the company for it is GIVEN back to the shareholders. And sooner rather later, these debts would have to be repaid, which means future profits generated by the company would have to be used to repay these debts and not forgetting the interest cost.

Clearly this is but one sure insane and ludicrous manner to manage a company.

• It simply makes no sense for a asset with a says 30 years concession life to have a 15 years debt tenure -- ideally, it should match it with a 30 years tail debt tenure, if there is enough depth in the debt market. After all, this is an asset-based company, not much upside for shareholders can be gained from operational improvement, if not from financial engineering.

Last but not least, I do understand the above rational and if you do read again, I am not against Litrak's sukuk exercise at all. What I am against is returning the excess cash. Surely the company can think of a better way to generate more returns for the company and its shareholders.

Litrak may return RM1 per share!

Published on The Edge. 18-03-2008: Litrak may return RM1 per share with debt refinancing plan

I find it so amusing!

• KUALA LUMPUR: Lingkaran Trans Kota Holdings Bhd (Litrak) may return RM1 per share through a capital repayment exercise after it refinances existing debts to free up more cash flow for shareholders, analysts said.
  
  Analysts expect Litrak to undertake a capital repayment exercise after it proposed last Friday the issuance of up to RM1.55 billion in Islamic debt papers under a sukuk programme. The new debt issue is meant to refinance the highway concessionaire’s existing borrowings and redeemable unsecured loan stocks of RM1.2 billion and to fund working capital and other operational purposes.
  
  Analysts said the proceeds from the sukuk bond issue would fully retire Litrak’s existing debts that were taken to fund the construction of the Damansara-Puchong Expressway (LDP). Given the strong traffic flow at the LDP, the sukuk bond issue would allow Litrak to extend the repayment tenure of its debts, while freeing up more immediate cash flow for shareholders.
  
  According to a research note by Aseambankers, Litrak has a total debt of RM819 million as at December 2007. Assuming the entire sukuk programme was drawn up, analysts estimated that Litrak would have a cash surplus of RM726 million, which could potentially be returned to shareholders.
  
  “However, we believe that the maximum surplus amount of RM726 million may not be returned to shareholders in full, with some to be kept for future investments. Ultimately, a capital repayment of at least RM1 per share (or RM492 million in total) is more likely,” it said.

Let's see if I can understand this correctly. What this analyst is suggesting that ultimately Litrak would undergo this Sukuk program and borrow 1.55 billion ringgit, so that it could repay shareholders of at least rm1 per share.

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WOW!

Incredible!

What a wonderful suggestion! Isn't life simply grand?

However, some would simply find it ludicrous! What's the analyst insinuating?

Which sane company would borrow large lump sump of money to return back to shareholders?

Are we really having a super duper early Christmas?

And if what is speculated here is true, my gosh, this simply is the most pathetic way to run a company!