14 April 2012

Why Government Should NOT Guarantee JCorp Debt Refinancing?

It's becoming confusing for many people, especially outsiders (non-Malaysian), as to the role of Government to Malaysian corporate. And, it had been more confusing when Government dishes out lots of Goodies to certain groups of people (as long as they are eligible voters) citing to help bring down the burden of Rakyat. Good reason though. However, many of us know that this may short-lived just because of the coming general election. Anyway, this is part of the political gimmick usually played around the world. Nothing's wrong.

One end, our Government targeted to bring down the deficit numbers by cutting subsidies like Petrol prices. But on the other end, it dishing our cash just like what announced during Budget 2012, citing Government had made encouraging improvements in collecting taxes. Then, why not bring down the budget deficit of the country first? Does few hundred ringgits really make huge different for people?

A BAD example set by JCorp?
The latest movements by Government in corporate world is by GURANTEEING a fundraising exercise by Johor Corporation (JCorp) that will help the state agency to meet its immediate debt obligations.

JCorp, the strategic investment arm of Johor, announced that it planned to issue a sukuk wakalah Islamic finance instrument worth RM 3billion to be directed at redeeming the state-owned corporation's outstanding bonds worth RM3.2billion maturing at end-July. This is not an usual treatment by Government in providing support for fundraising schemes directed at refinancing existing debt.

Subsidiaries of JCorp

Why this may Backfire?

  1. Bankers and investment analysts said the Government's move for JCorp sets a potentially negative precedent because it could encourage other financially distressed state agencies to propose similar debt restructuring programs. (source: TheEdge)
  2. Guaranteeing means Government is liable for the fundraising exercise when things turn sour.
  3. Does Government study thoroughly before guaranteeing? If the said corporate perform well, why it needs Government's backing? Is it because of high debt to asset ratio that scared away financial institutions?

By looking at the stable of companies under the umbrella of JCorp, Finance Malaysia don't think that it will go burst easily. However, the above concerns must be addressed to avoid future backfire. When state agencies doesn't do well, it definitely will affect the economy, subsequently Government. This is just a wake up call for relevant parties. Let's jom KFC...

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