Tanco Holdings Bhd, which is bogged down by a RM270 million loan it took from a unit of the beleaguered Lehman Brothers in 2007, may have secured a substantial reduction in its debt obligations, say sources.
In its books, Tanco has booked a sum of RM314.06 million under current liabilities as “deferred benefit pending outcome of litigation”. The amount is owed to Lehman Brothers Commercial Corp Asia Ltd, a unit of US-based Lehman Brothers, which wound up in September 2008 sparked the global financial crisis. It is believed the sum owed has grown over the years due to interest cost.
However, sources say, there is an agreement in principle for Tanco — which is involved in property development and manages and own resorts — to get a substantial haircut after lengthy negotiations.
Tanco officials had not responded to queries from The Edge by press time.
Tanco’s shareholders’ funds amount to RM173 million, so a cut in its debt obligations would lighten its balance sheet significantly.
For instance, if Tanco were to get a 50% haircut, this would mean it only has to settle some RM157.05 million, which should be more manageable for the company.
“A cut of about 10% in its debt obligations would translate to slightly less than a 10 sen increase in exceptional gain. The net tangible assets of the company would also increase,” says the source. Tanco’s net tangible assets or net asset value per share stands at about 52 sen as at Sept 30, 2010
Still, the caveat remains that Tanco had negative operating cash flow during the first nine months of last year — a deficit of RM19,000 as at Sept 30, 2010. Its cash and cash equivalents were RM9.9 million.
For the nine-month period, Tanco posted a net loss of RM1.64 million, from RM3.1 million net profit a year ago. Revenue fell 38% to RM11.76 million.
Be that as it may, Tanco has landbank that it could monetise to help settle its outstanding debts owed to Lehman.
As at Sept 30, 2010, Tanco had RM239.1 million worth of land held for property development. It also had receivables of RM19.72 million.
The question is, how much can Tanco realise from disposing of its assets.
Tanco started out producing and selling rubber sheets and cultivating oil palm at its plantation in Kuantan, Pahang, in 1995. It was listed on the main board of the local bourse in May 1961.
At the end of 1995, it acquired Palm Springs Development Sdn Bhd (PSDSB), a property development company that has a landbank of 423 acres near Port Dickson, resulting in a significant diversification of Tanco’s core business activities.
Two years later, Tanco bought over Tanco Properties Sdn Bhd, the developer of Bandar Country Homes in Rawang, and subsequently went into the vacation ownership business and businesses related to tourism, leisure and entertainment.
Currently, its unit Tanco Resorts Bhd has eight resort properties — five in Malaysia, two in the UK and one in Australia — as well as three timeshare-based clubs and one recreation-based club, all of which are owned, operated and /or managed by TRB.
Tanco is a relatively liquid counter. It reached its 52-week high of 23.5 sen on Jan 14. However, it has yet to attract any institutional shareholders. Its main shareholders include Datuk Tan Jing Nam, the group’s managing director, with a 26.55% stake, and Datuk Neo Say Yeow, with 5.31% equity interest, based on its 2009 annual report.
How the Lehman deal turned sour
Tanco seems to have had a spate of bad luck when it comes to meeting its debt obligations.
About six years ago, the significant decline in the group’s businesses seriously affected its cash flow and it was not able to meet its debt obligation of some RM343.3 million owed to three groups of lenders. It was subsequently classified as a PN17 company.
Then, in November 2007, Tanco accepted a two-year loan worth RM239.6 million from Lehman Brothers to help settle all its existing secured debts and solve the company’s financial problems.
About three months later, Tanco was taken off of the PN17 list. But subsequently, the deal with Lehman, which was then viewed as a lifeline for the company, turned sour.
After Lehman’s parent declared bankruptcy, Tanco submitted a proposal in December 2008 to the provisional liquidators of Lehman, KPMG Corporate Services Sdn Bhd, to restructure its loans and repayment schedule.
The terms of the proposal included the loan being converted into a ringgit-denominated one, a revision of interest rates, a waiver of principal and an extended repayment period.
In an interesting twist, in May 2009, after seeking legal opinion, Tanco filed a writ against Lehman and other related parties on the basis that the Lehman loan facility was illegal and unenforceable.
This was to establish that Lehman was not entitled to any restitution on the monies advanced under the loan agreement.
On this basis, Tanco has since reclassified the loans, amounting to RM314.06 million, as “deferred benefits pending the outcome of litigation”.
Accordingly, the company has also ceased accruing interest and exchange differences arising from the loan.
Tanco had also obtained an injunction to restrain Malaysian Trustees Bhd, as trustee of Lehman, from exercising any rights and/or entitlements pursuant to the loan facility.
Lehman, in response, appealed against this decision. The litigation is still ongoing and there has not been any development on the case to date.
One thing is for sure: Tanco will definitely get a big break in the event that Lehman agrees to give it a massive haircut for the loan.
This article appeared in Corporate, The Edge Malaysia, Issue 841, Jan 17-23, 2011