Thursday, 15 July 2010

Protecting bondholders vital; Ball in the Court for Pesaka Astana and other defendants

Protecting bondholders vital

Plain Speaking - By Yap Leng Kuen

THE “landmark’’ judgment handed by the High Court that the adviser and arranger of bonds are just as liable as the issuer for losses suffered by bondholders is significant in the development of the local bond market.

The judgement by Justice Datuk Mary Lim, based on a RM149mil lawsuit filed by 10 local financial institutions against issuer Pesaka Astana (M) Sdn Bhd, is an old case for which the oral judgment came out in early July.

In the light of recent corporate scandals, it is a timely reminder that high priority should also be placed on the investors, without whom there will be no bond market.

“In most emerging countries, the issuer side is normally regarded to be more crucial in ensuring the success of the bond market,” said an industry player. Corporates will be asked to issue more bonds, while details such as structure and size will be scrutinised.

However, to ensure continued demand and confidence in the market, investor protection is also vital to drum in the message of a high standard of care.

A high degree of investor protection and other favourable factors have led Malaysia’s bond market to grow by leaps and bounds since the markets faced its major stress test in the Asian financial crisis of 1997/98.
“When we get the buy side going, the issuers will come in droves,” said the industry player.

“We do not want the bond market to go in the same way as the equity market where in so many cases, we see that minority shareholders are not protected. This judgment is certainly critical and provides comfort to bondholders that at the end of the day, investor protection is still granted in this market.”

Already, the smaller issues are struggling in the sense that investors with risk averse appetite are not attracted to these bonds.

A case like this where the company had defaulted in September 2005 on RM140mil worth of Islamic debt securities issued in April 2004, dampens the sentiment even more.

No longer can an arranger just collect the fees and leave the buyer to fend for himself under the “buyer beware” kind of environment. If something goes wrong, he may get a joint suit from the parties involved and not just the bondholders.

“We can also have a situation where during an economic downturn, investors may suddenly decide to sue the arrangers and other parties that have money,” said another industry player.

“Big arrangers may find this worrying as it becomes their responsibility to prove that they are not liable.”
Industry watchers want to see if this represents a blanket judgment which will then have major implications on parties like trustees and rating agencies.

They will have to be responsible throughout the life of the bond. 
Of course, there are possibilities of appeal and the decision could well be uplifted, varied or even reversed. That is yet to be seen.

  • Senior business editor Yap Leng Kuen believes that the point has been made and market players have heard it loud and clear.
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    Ball in the court for Pesaka Astana and other defendants


    PETALING JAYA: Now that the High Court has ruled in favour of bondholders in the suit brought against Pesaka Astana (M) Sdn Bhd as well as the arranger and trustee of the bond issuance, it is up to these three defendants how they want to respond to the judgment.

    According to a source, the ball is now “at their side of the court”.

    He said it was now up to Pesaka Astana, KAF Discounts Bhd and Mayban Trustees Bhd on how they want to divide the payment of the RM149mil sought by the 10 bondholders, who filed the suit in 2005.

    Pesaka Astana supplies fire-fighting and military vehicles to the Defence Ministry.

    The Singapore Business Times had, on July 2, carried a story which said the judgment would “radically raise the bar on standards governing private debt issues in Malaysia” as the arranger and trustee were just as liable for losses suffered by the bondholders.

    High Court Justice Datuk Mary Lim, in a verbal judgment, had said the plaintiffs, which included CIMB Bank Bhd, had depended on the information memorandum provided by KAF to make informed investment decisions.

    She said the information was in the memorandum and “therefore it is KAF’s liability in the event of any misstatement therein.’’

    The newspaper said the suit underscored a newly-found ruthlessness in Malaysian financial litigation as at least two of the litigants on both sides of the suit were government-linked companies.

    Although Pesaka Astana and related companies had entered into a consent judgment in favour of the bondholders back in 2008, KAF and Mayban Trustees had chosen to go to trial.

    KAF treasury head Manimakudam Karuppiah told StarBiz the company was reviewing the case and would decide on its next course of action soon.

    “However, despite the judgment, there is no impact on the bank as we’re well-capitalised with shareholders’ fund close to RM1bil,” he added.

    Manimakudam said the company had also made full provisions to absorb the penalty and that business had not been affected.

    “We were also recently rated AA by Malaysian Rating Corp Bhd,” he said.

    Mayban Trustees, which the bondholders argued had failed to exercise the necessary care and due diligence expected of a trustee, said in a statement last week that it was “actively considering the next course of action”.

    It said the judgment “has no impact to the business operations of the company” and that it had in place “a strong team of professionals with priority chiefly on protecting the interest of all stakeholders and upholding best standards of service and management practice.”

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