Charge – form of security by banks

Charge is a common form of security taken by banks for granting a loan to the borrowers. When you charge your assets to the bank, you are called “Chargor” and the bank is “Chargee”. There is no transfer of ownership / title required to create a charge. The ownership remains with the Chargor. In the event the borrower is not able to pay back the loan, the bank has a right to foreclose the property.

In most cases, the borrower and the chargor are the same, this is called First Party Charge. Third Party Charge is when the borrower and chargor are different. For example, Party A and Party B enter into a joint venture to develop a housing project. Party A has the land and Party B has the expertise. Party B needs to borrow from the Bank to fund the development costs. In this case, Party A may offer the land as security for Party B’s loan.

There can be more than one charge on the same assets, i.e. First Charge, Second Charge. For example, your property value is RM1 million but your loan outstanding is only RM200,000, you may borrow more by creating a second charge over the same piece of asset. The rights of the subsequent Chargee shall rank after the first Chargee.

PKFZ and the infamous letter of support

Remember PKFZ and the infamous letter of support?

The courts recently found Port Klang Authority’s GM guilty in the PKFZ fiasco.

PKFZ was supposed to be Malaysia’s Jebel Ali Free Zone but it ended up a failure, a massive RM12 billion failure for the taxpayer. This was THE Malaysian financial scandal until it was eclipsed by 1MDB.

At the bottom of the fiasco was the Letter of Support issued by the Minister of Transport to support the bonds issued to develop PKFZ. The Letter was obviously issued to support the bonds because it was not likely to generate the cash flows to meet the financing obligations.

But did the Letter tantamount to a guarantee by the Government for the bonds? The Government decided to honour the Letter though it was signed by the Minister of Transport (bypassing MOF as required under the Financial Procedure Act), and even addressed to MARC, the rating agency (instead of the trustee for the bondholders)!

Finally, why was a similar Letter of Support issued by LKIM not honoured by the Government for the Malaysian International Tuna Port? The court judgments on that case make for very interesting reading.

Utusan – VSS

As expected, Utusan has announced a VSS exercise for its staff. While the employees grapple with the question of whether they should take up the VSS offer, the key question is will Utusan survive in the medium term. This is a question which all employees affected by VSS need to ask themselves.

Some companies undertake VSS exercises to cut costs, to be leaner in order to protect their profit margins. Some do it because they have no choice. During the 1997 economic crisis, many companies had to offer VSS to the staff. It was a matter of survival. A lot of companies did not pull through. Their turnaround plans did not work out. The key things to be considered are:

1. Does the company have a viable and changed business plan to improve its business and cash flows?
2. What is the company’s operating leverage like? High overheads vs variable costs.
3. Are the banks willing to take a hair cut on the loans?
4. Are the shareholders able and willing to pump in money?

When a turnaround fails, it is the remaining staff, suppliers and minority shareholders who will lose the most. Secured lenders will still have the collateral to offset their loss.