The plan to buy out all toll concessionaires by unknown private entity, Asas Serba Sdn Bhd, faces numerous roadblocks, the

foremost of which is its RM50 billion price tag, seen by many as being too costly.

In addition, there is the fear that a new monopoly in toll road ownership would be created if the deal were to follow through.

Bond market observers and bankers generally feel that Asas Serba's plan to acquire all the toll highways is fraught with challenges.

There are concerns by industry players, furthermore, of a huge indigestion in the bond market and that it would be too high a cost in pulling off the proposal.

'Too generous'

MIDF Amanah Invesment Bank Bhd’s Chief Executive Officer (CEO) Mohamad Safri Shahrul Hamid said one challenge for Asas Serba is securing demand from investors, as well as determining the pricing of the bonds, due to the enormous size of the debt papers.

"As for the proposed annual coupon rate of Asas Serba’s bonds of seven percent and a profit-sharing element of 2.5 per cent to 5 per cent, assuming that the bonds are rated AAA like toll operator PLUS Expressway Bhd, with a 20-year tenure, the returns are high and, maybe, not feasible.

"Even at longer tenures, the returns are a bit too generous," he told Bernama in a telephone interview.

Another challenge he said is, getting the market to digest such a big issue, the biggest ever in the history of the local bond market.

"It would likely have a "crowding effect" and cause investors to ask for better pricing while having the effect of (causing) Asas Serba's bonds financing cost to spiral," Mohamad Safri explained.

He also highlighted the need to convince toll operators and existing bondholders that the credit rating for the debt papers remains at least the same or better, for them to consider Asas Serba’s proposal.

"It partly depends on the structure of the bonds," he said.

Another obvious issue is whether Asas Serba is able to justify to the government its plan and, thus, gain approval.

"You will certainly require government approval as these are strategic assets. Also, PLUS has been managing the assets well so far," said Asian Finance Bank Bhd CEO, Mohamed Azahari Kamil.

Private entities may be 'crowded out'

In a Kenanga research note released a day after Asas Serba's media

conference, the brokerage noted that the proposal would need government approval and believed, it is unlikely to materialise.

The crowding out effect is an economic theory usually deployed to explain an increase in interest rates due to rising government borrowing in the money market.

When the government needs to borrow money, it issues bonds. The problem occurs when government debt "crowds out" private companies and individuals from the lending market.

Increased government borrowing tends to increase market interest rates. The problem is that the government can always pay the market interest rate, but there comes a point when corporations and individuals, can no longer afford to borrow.

In this particular case, the sheer size of Asas Serba's debt plans, will have the "crowding out" effect on the local bond market.

At a media briefing on May 3, Asas Serba Director Ibrahim Bidin said the company plans to issue a dividend bond offering annual dividends of seven percent to finance its RM50 billion bid.

In addition, its bondholders stand to enjoy a share of profits equivalent to an effective yield of 2.5 to 5 per cent.

Rating agency RAM Holdings Bhd, which expects corporate bond sales to fall this year due to the current lack of infrastructure projects, expects about RM55 billion to RM60 billion of gross corporate bonds and sukuk to be issued this year.

"Looking at the enormous size of the issue, it seems to be quite ambitious. In the end, how feasible the proposal is will largely depend on cash flow projections and the structure of the bonds," said a credit rating analyst.

He also said the issue is too big and would likely cause a potential problem on the demand front.

"The details of the proposals are still very brief and as such, I am unable to elaborate much on the matter. But looking at the enormous size of the issue, it seems to be quite ambitious," he added.

- Bernama