Directory of Innovative Financing: Malaysia

Malaysia

Project Title: YTL Power Generation local currency bond offering

Country: Malaysia

Issue Amount: M$1.5 billion (approximately US$570 million)

Sector: Power generation

Status: Placed in January, 1994

Sponsors/Lead Manager: YTL Power Generation, a subsidiary of Malaysian conglomerate YTL Corp; J. Schroder Wagg was the financial adviser and Bank Bumipitura the underwriter.

Purchaser: Malaysia's state-owned pension fund for salaried government employees, the Employee Provident Fund (EPF).

Financing Package: Proceeds of M$1.5 million, fixed rate 10%, 10-year bond issue were used to finance the country's first two independent power projects, (Pasir Gudang and Paka - combined total generating capacity of 1,212MW). The bonds were rated AA3 by Rating Agency Malaysia, the country's sole rating agency that was created in November, 1990. This portion complimented an additional M$1.16 (approximately $1.1 billion) floating rate facility that YTL arranged separately from Bank Bumiputra Malaysia Berhad, as well as its sponsor equity for the project.

Innovation: This transaction is considered to be a landmark in the development of Asia's fledgling local currency corporate bond markets. The combined package was the largest debt financing in Malaysian history, and allowed the sponsor to bypass commercial banks who offered higher interest rates and shorter maturities. It was an exceptionally long-dated offering in Malaysia, where most corporate issues carry five-year maturities. Among the aspects of the project that made it acceptable to Malaysia's leading institutional investor, EPF, was its 21-year, take-or-pay offtake contract with utility Tenaga Nasional, binding fuel supply agreement with state-run energy company Pertronas, and technical operations and maintenance contract with Siemens of Germany.

Brief: This transaction is considered to be in keeping with the Malaysian government's decision to develop the local currency corporate bond market as a way of moving the financial burden for large infrastructure projects into the private sector.

Until this transaction, EPF's portfolio has historically been dominated by government securities until its entry into the infant Malaysian corporate debt markets in 1993. The fund's emergence as a fixed-income purchaser, however, has led to the rise of a new generation of long-dated, fixed-rate tradeable bonds that have proved crucial to the financing of subsequent projects such as the new Kuala Lumpur International Airport, Light Rail Transit system, and KL City Centre Twin Towers.

The only drawback generally seen in the YTL deal is the fact that EPF purchased all of the bonds issued in this offering and has declined to trade them since, preferring to hold them to maturity. It has thus prevented the deal from setting a much- needed benchmark for Malaysian corporate debt. The success of this transaction for its first two BOO power projects, however, has since led YTL to pursue others in Indonesia, Singapore, China, Thailand and Cambodia.

Infrastructure and Financial Markets Division
Private Enterprise and Financial Markets Subdepartment
Sustainable Development Department
Inter-American Development Bank

Last updated: 02/26/07