PKFZ bondholders are in jeopardy !

PKFZ bond blues - written by Sharon Tan

Payments to Port Klang Free Zone (PKFZ) bondholders are in jeopardy as the Inland Revenue Board (IRB) has directed the Port Klang Authority (PKA) to remit RM328.4 million that is allegedly owed by Kuala Dimensi Sdn Bhd (KDSB) in backdated taxes.

According to sources, the letter to PKA by IRB to stop payment to KDSB was issued last Wednesday. Consequently, the port authority has written to the trustees of the bonds informing them of the stop-payment order by IRB and that it would comply with the instructions.

The trustees, OSK Trustees Bhd, in return have written to PKA and IRB seeking that the payment be released as the money was due to the bondholders and not KDSB.

OSK Trustees said the money is due to holders of papers issued by two special-purpose vehicles (SPVs) — Transshipment Megahub Bhd (TMB) and Valid Ventures Bhd (VVB) — and not KDSB.

The trustees also cited a legal opinion that if PKA retains the sum and pays it to IRB, it would constitute an event of default.

“If instructed by the holders of the bond, OSK may appoint receivers and managers over TMB and enforce ALA (Absolute Legal Assignment) against PKA through TMB for the benefit of bondholders,” the legal opinion stated.

It is learnt that the amount due to TMB is RM230 million and to VVB, RM120 million. The due date for payment is June 30, which is tomorrow.

“The amount (with PKA) is not the property of KDSB but that of TMB and VVB. There is therefore no question of PKA complying with IRB’s request which is premised on the misapprehension that the repayment amount is payable by PKA to KDSB,” the trustees told IRB and PKA.

Sources say the board of PKA is expected to meet today to deliberate on whether the trustees have any right over the money.

TMB and VVB are two of four SPVs set up by KDSB to raise RM4.6 billion to finance the PKFZ project. The other two SPVs are Special Port Vehicle Bhd and Free Zone Capital Bhd.

The total amount due to the four SPVs this month and next is RM723 million. The sum owed to TMB and VVB are due tomorrow while the remaining amount is due to the other two SPVs.

A source in IRB said PKA could not refuse IRB’s directive. “PKA has no recourse to refuse to make payment to IRB as directed, as Section 68 (1) ITA 67 gives IRB the right,” he said.

IRB has acted under Section 68 (1) which gives the director- general powers to appoint any person to the agent of any other person if he thinks fit.

Asked on the rights of the bondholders, the source said: “Unless the bondholders have first right as stipulated in the bond... So, even if IRB and the bondholders are on the same level playing field, IRB will prevail over the bondholders because of the Act.”

However, in its letter yesterday, OSK Trustees reminded PKA that the payments due had been absolutely assigned and payable by PKA.

OSK Trustees also said PKA was duty-bound to correct IRB’s misapprehension. KDSB has, with the consent of PKA in an absolute legal assignment dated Sept 13, 2004, absolutely assigned the repayment to TMB. Hence, the repayment amount was not payable by PKA to KDSB but from PKA to TMB, the trustees added.

“We put you on notice that PKA will be in breach of its undertaking to pay the repayment amounts to TMB and VVB in the event PKA does not pay the repayment amounts to TMB and VVB on the respective due dates,” said the letter.

OSK Trustees also highlighted serious adverse consequences to local and foreign bondholders/noteholders who have invested in the bonds/notes on the basis of PKA’s undertaking and the government’s credibility in the event of default.

“We also put you on notice that any payment made by PKA to IRB from the repayment amounts will not discharge PKA’s liability to TMB and VVB, and PKA will still be liable to TMB and VVB for the repayment amounts,” said OSK Trustees.

KDSB is the main contractor for the PKFZ project that saw huge cost overruns and resulted in PKA having to take a soft loan from the government to meet payments to bondholders. KDSB had issued bonds to the tune of RM4.6 billion with the backing of letters of support from the transport ministry.

Because the project has little cash flow, the loans had to be restructured or the cost could go beyond RM8 billion and even RM12.5 billion.


This article appeared in The Edge Financial Daily, June 29, 2010.