Is that RM1.1b bailout necessary?

A bailout by any other name - strategic purchase, loan, rescuing mainly bumiputera entrepreneurs, saving the oil and gas industry, etc - is still a bailout, so long as government money, our money, is used to save any private enterprise.

Yes, we are talking about that RM1.1 billion loan by a government-owned company to bankrupt former oil and gas high-flyer listed Sapura Energy Bhd, which started to get into trouble a decade ago and had no relief in sight.

The history is complicated. Sapura Energy was formed as a merger between Mokhzani Mahathir’s (yes, Dr Mahathir Mohamad’s son) Kencana Petroleum and Shahril Shamsuddin’s (son of Mahathir crony Shamsuddin Abdul Kadir) SapuraCrest Petroleum in 2012.

Shamsuddin made his money in telecommunications during Mahathir’s first tenure as prime minister.

That merger strangely involved a cash payment to the merger shareholders of some RM1.84 billion from bank borrowings, according to reports, which put the merged entity already at very high debt levels.

First, let us put to rest any notion that this is not a bailout and then move on to business prospects which suggest that this loan may not be easily recovered given Sapura Energy’s track record. Both are highly damaging to the Madani government and Prime Minister Anwar Ibrahim, who previously opposed any bailout.

Meaning of bailout

What is a bailout? The Cambridge Dictionary has a great and adequate definition: “The act of helping a person or organisation that is in difficulty, usually by giving or lending money.”

And it gives two examples. Example 1: Three years of huge losses forced the bank to seek a government bailout. Example 2: The administration assembled the US$50 billion emergency bailout package to ease a financial crisis in Mexico.

Note that it involves lending or giving money. A government-owned special purpose vehicle, Malaysia Development Holding Sdn Bhd (MDH), will give… sorry, lend, the RM1.1 billion.

The purpose of the loan: To be exclusively used to repay local vendors (reportedly numbering 2,000 and 80 percent bumiputera), without benefitting any existing shareholders or financial creditors, said Permodalan Nasional Bhd (PNB).

Government-owned investment company Permodalan Nasional Bhd

If I am owed say RM50,000 for work I did, and the person I did refuses to pay, can I run to the government for help to get a direct payment instead? Of course not. Therefore, if the government chooses to pay the debt of a company because the company cannot pay, it is assuming the liability of that company. An unquestionable bailout.

Why the bailout

But bailout by itself is not a dirty word. All the government needs to concern itself with is whether it needs to make this bailout and why. There are serious reasons why it should not and if it does, it needs to give more concrete reasons than saving 59,000 jobs and 2,000 entrepreneurs.

PNB, the bumiputera investment fund which manages well over RM300 billion, is Sapura Energy’s largest shareholder owning 44 percent after it injected RM2.7 billion out of RM4 billion raised in rights issue proceeds in 2019.

That 44 percent stake is now worth a mere RM318 million, which means that the value of PNB’s investment has eroded by well over 90 percent from its peak, or over RM3 billion considering earlier investment costs. The share price chart below shows the share collapsing to a mere 4.5 sen from a peak of nearly RM5.

A couple of questions: Is the government in the business of giving out loans? No. What happens to the loan immediately? Remember that Sapura Energy is heavily in debt, to the tune of RM10.7 billion as of the end of October 2024.

It’s in the throes of a major restructuring which may result in a major haircut for its lenders. So effectively the market value of that RM1.1 billion debt will already be lower by as much as the haircut of the other lenders - a book loss which may be crystallised in full if Sapura Energy does not recover.

We need more information on this bailout. Who are the major ones and how much do they owe? What are their names? Who are their shareholders? What is their financial position, that is, how rich are they now? What other businesses do they have? Should they be helped in this manner? Who decides who gets helped?

A frightening history

Sapura Energy has a frightening history as this 2022 article titled “Boom and bust - How Sapura Energy got into the mess it is in” carried in The Edge explains.

Here are some salient points from that article:

1. In 2012, the newly merged Sapura Energy was saddled with extra debt during its restructuring exercise, with an extra RM1.96 billion of bank borrowings added to the merged entity, specifically for cash payments to shareholders of SapuraCrest Petroleum and Kencana Petroleum. As part of the exercise, shareholders of both companies received a total of RM1.84 billion cash, comprising RM875 million for shareholders of SapuraCrest and RM969 million for shareholders of Kencana.

2. Between FY2016 and FY2022, Sapura Energy made total impairments of a whopping RM14.9 billion. Breaking down the impairments into segmental asset classes, it would appear two-thirds, or some RM9.8 billion, were related to drilling operations. Another RM3.9 billion was for vessels, engineering and construction (E&C) and E&P, and RM1.15 billion for others.

3. In total, excluding the related-party transaction office rental, The Edge estimated (group CEO) Shahril (Shamsuddin’s) and (brother) Shahriman’s Sapura Holdings received RM1.17 billion from FY2013-2021, comprising RM444 million in remuneration, RM296 million in IP rights and trademarks, RM350 million from the SapuraCrest-Kencana merger cash distribution exercise, and RM79 million from dividends. In comparison, all shareholders (excluding Shahril and Sapura Holdings) received just RM401 million in dividends. One single shareholder received three times what was paid to all other shareholders.

All this would have warranted a forensic audit at Sapura Energy that Anwar had called for three years ago in a debate with Najib Razak. That would have established the extent of problems faced by the company, and its mismanagement, uncovered any crime, and determined whether it should have been saved or allowed to go under.

Prime Minister Anwar Ibrahim

If that audit has already been done, it has not been made public. Instead, PNB lost even more money by injecting RM2.7 billion more into Sapura Energy in 2019 when Mahathir, who is close to Sapura Energy via his son and his crony Shamsuddin, was prime minister.

Lots of questions remain unanswered over the viability of Sapura Energy and whether it should be shut down rather than saved, its many questionable decisions, and high payments to its CEO and major shareholders.

All these should have been settled before this RM1.1 billion was handed out. The government has embarked on a foolhardy exercise which may result in the loss of more money for it and PNB, hardly the outcome it desires. - Mkini

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P GUNASEGARAM says throwing good money after bad is futile.

The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.