Moody’s says RM6.2b govt aid for Felda credit negative

PETALING JAYA: The RM6.2 billion financial assistance to ailing Federal Land Development Authority (Felda) will add to the government’s debt burden, which is already significantly above the median of A-rated sovereigns, a credit negative, said Moody’s Investors Service.

“We estimate that the assistance will raise the government’s debt burden by 0.3% of GDP to 56.0% in 2019, substantially higher than median debt ratio for A-rated sovereigns of 37.8%, and up from 50.7% in 2017,“ it said in a report today.

In its estimates, Moody’s included the debt of state-owned investment fund 1Malaysia Development Bhd and the RM20 billion of funding provided to state-owned pilgrimage fund Tabung Haji at the end of last year through an asset-backed sukuk.

“A higher debt burden will weigh on Malaysia’s debt affordability, particularly because the share of revenue to GDP, at 16.3% in 2018, is likely remain at or near record lows. Interest payments account for 13.3% of revenue, significantly higher than the A-rated median of 4.0%.”

Felda was established in 1956 to manage the resettlement of the rural poor and employ them in Malaysia’s palm oil industry, but it has evolved into a financially independent statutory body supporting broader socio-economic development.

Its financial performance has been deteriorating since 2013. In 2017, its losses reached RM4.9 billion, compared to an average profit of RM700 million in the five years leading up to the listing of its commercial arm, FGV Holdings Bhd, in 2012, because of declining operating income from plantations due to lower palm oil prices, financially unviable investment decisions, alleged corruption and weak governance practices. Since then, its total liabilities have more than doubled to RM14.4 billion from RM6.5 billion.

Former Felda chairman Tan Sri Isa Samad has been charged with bribery linked to a hotel purchase and FGV Holdings has sued Isa and former CEO Datuk Mohd Emir Mavani Abdullah over the purchase of two luxury condominium units allegedly for above market price.

With its cash balance shrinking, Felda is unlikely to be able to meet its debt obligations without the government’s assistance. It recorded a loss of RM4.6 billion in earnings before interest and tax in 2017.

The financial aid announcement followed the release of a white paper that detailed the company’s deteriorating financial performance, and outlined plans to restore its viability and strengthen its governance practices.

The government plans to spread its aid over seven years. Felda will raise about half of this, which will be backed by government guarantees, while the remainder will come from loans and grants.

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