Incurring Debts to Return to Shareholders

Blogged previously: Litrak may return RM1 per share!

The Great Game said...

• Well, no offence, but at least in overseas market, this is actually very common for mature infrastructure assets which have demonstrated track record to gear up to repatriate the surplus to shareholders. There are some new products like accredited swaps which proliferates this type of transaction. It simply makes no sense for a asset with a says 30 years concession life to have a 15 years debt tenure -- ideally, it should match it with a 30 years tail debt tenure, if there is enough depth in the debt market. After all, this is an asset-based company, not much upside for shareholders can be gained from operational improvement, if not from financial engineering.

Here are some of my thoughts again on this issue.

Firstly, the issue of what's practiced in the overseas market. In my opinion, just because it is practiced in the overseas market does not mean that companies here should follow. For me, companies here should emulate all the good examples set and should discard all the bad practices made!

In this example, one needs to look at the justifications of raising debts just to return to the shareholders.

I am not saying that all debts are negative. Some debts are indeed productive if the company manages to use the debt as a means to finance capital expenditure exercises that creates the opportunity for the company to generate more returns in the future.

However, not all debts are good. And the more debts issued by a firm, the higher the risk premium for the company.

And in this case where debts is incurred to repay shareholders, these debts incurred does not generate any returns for the company for it is GIVEN back to the shareholders. And sooner rather later, these debts would have to be repaid, which means future profits generated by the company would have to be used to repay these debts and not forgetting the interest cost.

Clearly this is but one sure insane and ludicrous manner to manage a company.

• It simply makes no sense for a asset with a says 30 years concession life to have a 15 years debt tenure -- ideally, it should match it with a 30 years tail debt tenure, if there is enough depth in the debt market. After all, this is an asset-based company, not much upside for shareholders can be gained from operational improvement, if not from financial engineering.

Last but not least, I do understand the above rational and if you do read again, I am not against Litrak's sukuk exercise at all. What I am against is returning the excess cash. Surely the company can think of a better way to generate more returns for the company and its shareholders.