The Asian Wall Street Journal
13th June 2001

Debt-Workout Agency Is Ordered To Restructure Johor State's Loans Move Raises Doubts About Government-Backed Loans

By LESLIE LOPEZ

Staff Reporter of THE WALL STREET JOURNAL

KUALA LUMPUR, Malaysia -- Malaysia's bad-debt woes are spreading to the public sector, raising questions about Kuala Lumpur's backing for government-affiliated borrowers and the level of nonperforming loans in the country's banking system.

In an unpublicized move, the Malaysian government this month directed the state-run Corporate Debt Restructuring Committee, or CDRC, to help restructure 5.5 billion ringgit ($1.45 billion) in debt owed to local and foreign creditors by Perbadanan Johor, or Johor Corp., the main investment arm of the Johor state government.

The directive is unprecedented. The CDRC was formed to help arrange corporate-debt restructurings after Asia's 1997 financial crisis left many Malaysian companies unable to repay their creditors. But the Johor Corp. assignment marks the first time the CDRC has been asked to help resolve debt problems at an agency owned by a state government.

CDRC officials confirmed that they have begun working on Johor Corp.'s bad loans, but declined to comment further. Johor Corp. executives said they weren't immediately prepared to discuss the matter.

The government's decision to order the CDRC to help Johor Corp. -- instead of stepping up to guarantee or otherwise back the company's borrowings -- is worrying Malaysian bankers familiar with the development. Some say the move makes it unclear to what extent the federal government ultimately stands behind Malaysia's officially acknowledged public-sector debt -- which was estimated to total 77.23 billion ringgit at the end of last year -- and an unknown amount of borrowing by entities such as Johor Corp.

The Johor Corp. affair also puts a spotlight on the way Malaysia accounts for nonperforming loans, bankers say. They suggest that the amount of Malaysia's nonperforming loans -- which officially stood at 26.3 billion ringgit, or 6.7% of total loans in the banking system, at the end of February -- may be understated. That's because Malaysian banks have generally continued to carry troubled loans to state-linked entities, such as Johor Corp., on their books as income-producing assets.

In the past, Malaysian banks haven't worried too much about possible defaults by such companies because their loans were usually backed by so-called comfort letters from state governments. "It's not a full guarantee, but provides enough comfort that the state government will back these groups in the event of a default," says a chief executive of a Malaysian bank that does extensive business with state agencies.

Distribution of Debt Malaysia's national debt, in billions of ringgit:
Item	1999	2000
Medium & long term	136.63	136.85
Public sector	77.01	77.23
Federal government	18.37	19.39
NFPEs*	58.64	57.84
Private sector	59.62	59.62
Short term	24.12	19.79
Total	160.75	156.64
*Nonfinancial public enterprises Source: Treasury Report

Now, Johor Corp.'s problems are testing the commitment of state governments to stand behind debts run up by the enterprises they own, as well as the federal government's commitment to back up the state governments.

A senior federal government official familiar with Johor Corp.'s finances says that by transferring responsibility for a debt restructuring to the CDRC, Kuala Lumpur is signaling that it won't intervene to rescue such companies. "The government's resources are limited. State agencies will have to sell assets and restructure" their loans, says the official. He adds that banks that lent to such concerns will have to "take haircuts," or losses, on loans that aren't guaranteed by the federal government.

Kuala Lumpur's financial position is already stretched. According to the latest Finance Ministry report, issued in October, about 19.4 billion ringgit of the acknowledged 77.23 billion ringgit in public-sector debt is owed by the federal government. A total of 57.8 billion ringgit is owed by so-called nonfinancial public enterprises, including two of Malaysia's biggest publicly listed companies, Tenaga Nasional Bhd., the state-controlled power company, and national telecommunications company Telekom Malaysia Bhd.

The federal government's other financial obligations include guarantees it has extended on various loans to state-backed projects and businesses. The last published report by Malaysia's auditor general, released last year, said that such federally guaranteed loans totaled 48 billion ringgit at the end of 1999, up from 32.3 billion ringgit a year earlier.

The size of Johor Corp.'s debt problem caught many Malaysian bankers by surprise. "There was a time I would readily lend to Johor Corp. because they were among the most professional of all state agencies," says the chief executive of a bank with a small exposure to Johor Corp. "It makes you wonder about the position of other agencies."

Johor Corp. was formed in 1968 to act as the main investment arm of the Johor state government. By the mid-1990s the agency controlled more than 200 companies, employed more than 21,000 people locally and abroad, and had interests in palm-oil plantations, property development, health care, timber, hotels, finance and steel manufacturing.

But this aggressive expansion was funded largely by bank borrowings. When Asia's financial crisis hit in mid-1997, Johor Corp. was unable to service its debt. The company owes about 4.5 billion ringgit to local banks and one billion ringgit to foreign financial institutions.

Despite its diverse business undertakings, only Johor Corp.'s health-care, palm-oil and property divisions are profitable. A recent report by the Rating Agency of Malaysia on Johor Corp. estimated that the company accrued interest obligations of about 116.3 million ringgit last year, when the company faced repayment of principal on its loans totaling an additional 100 million ringgit. "Given the group's earnings profile, the 5.5 billion ringgit of debt is untenable," said the rating agency's report.