IJM and Talam

Corporate: Talam pushing for debt-conversion plan By Siow Chen Ming The Edge Daily (dated: August 2008)
Talam Corp Bhd, a troubled property developer, is pushing for a massive debt-to-equity restructuring scheme that its lenders may find hard to reject. Not that the proposal is favourable, but because the lenders have limited options. The bulk of the debts concerned have no financial recourse to Talam the listed company, but mainly on the company's operating subsidiaries that develop certain housing projects. "Talam's stance is obvious. Bondholders can either accept the scheme on the table or take over the housing projects, which secure the bonds," says a source. The prospect of the second option is bleak. If bondholders were to take over the housing projects, they will have to confront a group of angry house buyers who are getting frustrated over the slow construction progress in Talam's projects.

Inclusive of debts issued by special purpose vehicles, Talam group's total outstanding borrowings amounted to about RM1 billion.

The largest chunk is in the form of an outstanding RM498 million Islamic bond (BaIDS) issued by special purpose debt vehicle Ambang Sentosa Sdn Bhd. Ambang Sentosa had issued the BaIDS and utilised the proceeds to purchase from Maxisegar Sdn Bhd (wholly owned by Talam) the rights to the sales receivables of the Puncak Jalil township project. The BaIDS is secured on the housing project. According to sources, Talam has proposed to settle the outstanding BaIDS issued by Ambang Sentosa with a final settlement of RM348 million. This will be in the form of RM62 million cash (which is already in the escrow account) and the issuing of RM286 million five-year redeemable convertible preference shares (RCPS) in Talam bearing zero interest. While this indicates a haircut of about 30% or RM150 million, Talam has offered to bondholders the rights to a pool of future sales proceeds, amounting to RM69 million, from the sale of the remnants of unsold units.

The group is also proposing to settle in full another outstanding bond of RM196 million in the form of Murabahah notes facility (MUNIF) issued by indirect wholly owned subsidiary Europlus Corp Sdn Bhd. The group plans to replace the MUNIF with five-year redeemable convertible secured loan stocks bearing zero coupon. The issuing of secured loan stocks is preferred over RCPS because the MUNIF is currently secured on some landbanks, apart from sales receivables from development projects that include Bukit Beruntung I, II, and III, Lagoon Perdana, Kinrara Section 3 and other projects.

On another note, the outstanding RM163 million MUNIF issued by Perkspektif Perkasa Sdn Bhd (PPSB), the developer of the Bandar Pinggiran Cyber township project in Cyberjaya, will also be featured in the debt-restructuring scheme. Unlike the bonds issued by Ambang Sentosa and Europlus, the PPSB's MUNIF has an unconditional financial recourse to Talam.

As for the remaining term loan of about RM230 million, Talam has planned to settle it by issuing RCPS or other instruments that are convertible into Talam shares.

Based on maximum scenario, the conversion of all these instruments, which will be issued to replace the group's debts, may dilute Kumpulan Europlus Bhd (K-Euro)'s interest in Talam to about 25%, from 47% currently. "Talam's management is busy conducting meetings with the lenders. A formal bondholders' meeting will be held in September and if approved, these proposals will be submitted for regulatory approvals. The implementation of the debt-conversion scheme is expected to be next year," says a source.

Talam, once known as the most productive house developer, ran smack into trouble last year (2007). It was unable to carry out construction works in its development projects according to schedule. Work progress in its largest project, Puncak Jalil, has been particularly affected. All these have resulted in the group being unable to receive progress claims from end-financiers and hence led to a mismatch of cash flow to meet debt obligations. The management had previously put the blame for these stalled projects on the shortage of sand, steel, workers and the government's suspension of hill slope work. However, bondholders are not convinced. "At the end of the day, the project failed because the group could not put up money for the balance development costs," says a representative of a bondholder.

In the Puncak Jalil project, for instance, the remaining cost to completion is estimated to be RM305 million (construction cost RM295 million plus development charges of RM10 million). To restart the project would require sizeable capital that Talam, in its dire straits, could not afford to come up with. This is why Talam is roping in IJM Corp Bhd to undertake the construction of the Puncak Jalil project for RM295 million, inclusive of a 15% margin. The participation of IJM in this project is crucial for bondholders to agree to its debt-restructuring scheme.
IJM into the picture The situation in Talam could be much worse if not for the participation of IJM.

Other than agreeing to become the main contractor for the Puncak Jalil project, a source says IJM has acquired some of the smaller and uncompleted development projects from Talam for a sum of over RM100 million. These include the Monte Bayu condominium project in Cheras, Ukay Perdana as well as some projects in Puchong. IJM has resumed work in these projects and is now marketing the unsold units under the IJM banner.

"This has provided some necessary cash flow to keep Talam running. Nevertheless, IJM also takes this opportunity to increase its exposure in the property development sector as there are not many construction jobs around," says the source.

IJM has yet to finalise its purchase of a 25% stake in K-Euro, Talam's parent company, from Tan Sri Chan Ah Chye. This is pending the signing of the RM3 billion West Coast Highway concession between K-Euro's 60% owned subsidiary Konsortium LPB Sdn Bhd and the government. According to K-Euro's annual report released early August, Konsortium LPB has finalised the technical and financial terms as well as the conditions of the concession agreement with the government. These are now pending approvals.

Should the West Coast Highway concession be signed, a source says the construction of the highway will be undertaken by a turnkey contractor to be set up by IJM and K-Euro on a 50:50 basis. This would allow K-Euro to reap the construction profits as well as cash flow, before the highway commences tolling.
This format of collaboration is visible from IJM and K-Euro's ongoing joint venture in developing some 3,900 acres of landbank in Kuala Langat (near Kota Kemuning, Shah Alam). This is through Radiant Pillar Sdn Bhd, a joint venture set up by IJM and K-Euro with equal stakes. Radiant Pillar owns 70% stake of Canal City Construction Sdn Bhd. The latter has received the Kuala Langat landbank from the Selangor government as payment in kind for constructing a toll-free expressway linking Shah Alam-Shah Alam 2 together with the flood mitigation project. The value of the two projects is RM1.1 billion.

The Kuala Langat landbank will feature prominently in the property development business of IJM and K-Euro. Both companies, through JV Radiant Pillar, have plans to develop the Kuala Langat landbank into an upscale project based on the "Venice" concept of a canal city.

K-Euro is in a better financial shape than its property arm Talam. It has a total borrowing of about RM212 million, against its shareholders' fund of RM228.8 million.