KUALA LUMPUR, Oct 18 – Asas Serba Sdn Bhd may encounter problems to fund its massive RM50 billion proposed takeover of all toll highways nationwide due to cost and technical issues.
Bond experts and industry observers say the company’s only likely option for such a mammoth funding, taking into account the long gestation period for toll returns, would be through the bond market.
As such, they say, the enormous size of the funding “would definitely cause indigestion problems” to the local bond market as it could create an over supply situation.
“The large size would pose some difficulty for the market to absorb and may result in higher cost of funds to other issuers as it could increase the supply of bonds in the market.
“If this happens, it could result in investors demanding for higher yields for their investments for bonds,” RAM Holdings Bhd chief economist Dr Yeah Kim Leng told Bernama.
Bond experts say this could be further compounded by the fact that the local bond market has never experienced such a big amount and is likely to react negatively.
The large size could also cause some anxiety to investors as it may be perceived as riskier, they say but note that it will also depend on the bond’s credit rating.
They say Asas Serba may also face problems in structuring its bond issue as the various toll concessions have different terms and cash flow projections.
As such, they are sceptical that Asas Serba’s bond issue would get a good credit rating and thus its borrowing cost could be on the high side.
According to reports, Asas Serba had submitted two proposals to the government in May and August this year and it had also estimated the acquisition will save the government RM114 billion as at 2038. It would also cut toll rates by 20 per cent if the acquisition materialises.
Among the key persons behind the company is Kuala Lumpur Malay Chamber of Commerce chairman Datuk Syed Amin Al-Jeffri. He was reported to have said that the company planned to get a master concession to operate all the toll roads, but the concession would not extend beyond 2038.
A local bond senior executive who refused to be named, said he was sceptical about Asas Serba’s takeover plan because of the lack of details and the mammoth capital funding required. For him, the only likely option for such a massive funding would be through bonds as it involves long gestation period.
“This could be a problem for Asas Serba as it does not have a track record, and if its cash flow projection is not strong, it could result in a non-favourable rating, thus making funding expensive.
“The cost of debt for corporate will rise by about 50 basis points for every one notch drop in credit rating. This would be very significant if the amount of debt for this project is expected to cost RM50 billion,” he said.
RAM’s Yeah added that there could be some price effect if Asas Serba’s bond issue was not fully absorbed by the local bond market and this could also result in higher underwriting cost as their resources would be stretched.
“But then again, it will depend on Asas Serba’s credit rating – if it is high, the bond issue would be more easily digested. “On the other hand if the rating is not that high, it may have a compounding effect on the risk premium. It will also cause a crowding effect – an over supply impact to other bonds issues.
“For one, there is already big demand from the water industry, submarine cables for the Bakun hydroelectric project, telecommunication sector like Maxis Communications as well as other infrastructure projects,” he said.
A bond trader from a local bank-owned broking house, said if Asas Serba were to issue its RM50 billion funding all in one go, it would cause a “massive indigestion” to the local bond market, and financing cost would skyrocket.
“I doubt if such a massive funding can be done in one go as it is just too big for investors to digest. If any, I believe it needs to be done in a staggered basis to be more palatable for investors,” he said.
Analysts and bond experts agree that before Asas Serba can to proceed with any type of bond funding, it must first get all the terms and agreements with the toll operators firmed up and of course, the government’s approval.
This alone, they say, can be a challenge with pricing becoming a major stumbling block and other business considerations complicating the deal further. – Bernama
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The highways should be auctioned to the highest bidder with specific terms, e.g. immediate reduction of toll rate by e.g. 30% for say 30 years.
Or, EPF could own the highways, but the maintenance contract need to be open tendered to best party.