KUALA LUMPUR: Malaysia’s controversial US$230 million (RM1.1 billion) lifeline to Sapura Energy Bhd, a one-time high-flying oil and gas services company with a global reach, has triggered a public debate over Prime Minister Anwar Ibrahim’s long-standing pledge of ending bailouts of troubled companies using public funds. 

Financial executives, opposition politicians and Anwar’s own backers are slamming the proposed state-sponsored rescue because they say the plan is laced more with political motivations rather than real economic rationale.

“Sapura is bleeding financially, and this injection will have to be the first of many through handouts (in the form of contracts) from Petronas to keep it afloat,” predicted a consultant at a boutique financial consultancy in the capital Kuala Lumpur, referring to the national oil corporation Petroliam Nasional Bhd.

Hassan Abdul Karim, an elected parliamentarian from Anwar’s own Parti Keadilan Rakyat political party, said the cash injection into Sapura Energy fit the definition of a “bailout” no matter how the government presented the rescue plan.

In statements to the local media, the Member of Parliament for Pasir Gudang constituency in Johor cited the Cambridge Dictionary when referring to the definition of a bailout and noted its closest equivalent in the Malay language would be “menyelamatkan”, which roughly means “is to save”.

Other politicians from both the ruling coalition and opposition have similarly weighed in on the saga.

Anwar, who has been criticised for the slow pace of economic reforms since taking over as premier in November 2022, has denied the rescue of Sapura Energy is a bailout and strongly rejected criticism of the government’s move.

Instead, he described it as a “strategic investment” that was aimed at helping prop up the oil and gas ecosystem.

He argued that the government’s chief motivation to intervene in Sapura Energy’s debt crisis was to rescue bumiputera suppliers and other contractors, who were staring at potential bankruptcies because the troubled oil and gas services company could no longer meet its obligations.

In 2022, when Anwar was still the opposition leader, he had strongly argued against a bailout of Sapura Energy without a forensic audit of its mismanagement.

The company made profits in only three years in the past decade, and incurred losses of RM17.6 billion between 2020 and 2024, according to published accounts.

Defending the rescue plan, Anwar said the "decision was not at all easy” and it was only green-lighted following a top-management overhaul at the company.

Ibrahim Suffian of the Merdeka Centre, an opinion research firm, told CNA: “The Malay public won’t see it (the government's move) as negative because it will help contractors and vendors from the community, but the problem with the government is always the poor communication, and explaining why Sapura is too big to fail would help.”  

To be sure, the capital injection into Sapura Energy is far more palatable than the financial bailouts during previous administrations, particularly the 22-year reign of former premier Mahathir Mohamad that began in 1981, noted bankers and financial consultants.

At the onset of the regional financial crisis that began in 1997, Mahathir ordered national oil corporation Petronas to take over the debt-laden shipping assets of Konsortium Perkapalan Bhd, which was controlled by his eldest son Mirzan Mahathir.

That deal, which cost Petronas RM836 million, was later followed by several other bailouts of businessmen seen to have close ties with the government. 

The most spectacular – and particularly costly for the Malaysian taxpayer – during the Mahathir era was the government’s RM1.79 billion takeover of troubled national carrier Malaysian Airline System (MAS) in early 2000. 

In most of the financial rescues at the time, the Mahathir government argued that assistance from the state was necessary to prevent a fallout in the country’s financial system that was being wracked by non-performing loans because of the financial crisis.

In the Sapura Energy rescue, the company’s lenders are being forced to restructure the company’s debt and absorb losses for the troubled loans.

DANGEROUS PRECEDENT?

Still, bankers and financial consultants wonder whether the government’s plan for Sapura Energy may be a case of throwing good money after bad.

That is because Sapura Energy is technically insolvent, a financial terminology that applies to a company when its liabilities or financial obligations outstrip its assets. 

According to its published accounts, it has about RM18 billion in liabilities and RM13.65 billion in assets, most of which are already used as collateral for existing loans.

Of the RM18 billion in liabilities, roughly RM10 billion are debts owed to the country’s financial sector and, according to bankers close to the situation, the biggest lender is state-controlled Malayan Banking Bhd, or Maybank, the country’s largest financial institution.

Several financial executives also wonder whether the Anwar government is setting a potentially dangerous precedent with its novel approach to the latest financial rescue plan.

“Under this deal, the Ministry of Finance appears to be inadvertently setting itself up as the lender of last resort and this may encourage other companies who are unable to meet their obligations to third party vendors to issue debt instruments and sell it to the government,” said the owner of a private financial consulting firm, who declined to be named because he relies on the Anwar administration for business.

ANWAR'S POLITICAL BIND

The unfolding saga at Sapura Energy is turning into a major political hot potato for Anwar, who has been a vocal opponent of state-sponsored bailouts.

Here is why.

The Sapura Energy rescue has become steeped in Malaysia’s troubled politics, because of the deep divisions in the country’s dominant ethnic Malay community that Anwar is desperately trying to win over from his Islamist political opponents.

Sapura Energy is 40 per cent-controlled by state-owned Permodalan Nasional Bhd (PNB), one of Malaysia’s largest fund managers that was established in 1978 primarily to boost the economic standing of the country’s dominant ethnic Malay population.

As premier, Anwar is the chairman of PNB’s chief investment arm, Yayasan Pelaburan Bumiputera, which is the corporate vehicle that controls the sovereign fund’s stake in Sapura Energy.

The vendors who will benefit from the bailout of Sapura Energy are almost entirely ethnic Malay contractors and sub-contractors.

Failure by the Anwar administration to come to the aid of this group would surely be weaponised by the country’s opposition to attack the ruling multi-racial coalition government. 

On the other hand, critics of the premier are accusing him of caving in to appease the politically powerful ethnic Malay business elite.

“Anwar's problem is that he is often forced to make compromises and, as a result, his popularity stays stagnant because there are always pockets of Malaysians who are unhappy,” said Ibrahim of Merdeka Centre.

MECHANICS OF THE RESCUE

According to bankers involved in the rescue plan, Sapura Energy will issue debt instruments, known as redeemable convertible loan notes, that would carry an annual interest rate of 2 per cent, to the Ministry of Finance in return for RM1.1 billion that would then be used to pay contractors, sub-contractors and other service suppliers.

The settlement of the outstanding debt will allow the company’s main lenders – the state-controlled financial institutions Maybank, RHB and CIMB – to carry out a restructuring of Sapura Energy’s outstanding debt.

“The deal is not good for the banks because they will need to take haircut on outstanding debt that will need to be amortised in their book,” noted a director of one of the banks involved in the financial exercise, who declined to be named because he is not allowed to speak to the media on the grounds of banking secrecy.

A haircut refers to banks getting less than what they are owed.

“But without the (government) injection, there was no way to carry out a restructuring. With this, Sapura Energy does have a fighting chance to become viable again,” said the director, who declined to provide details on the size of the write-off the financial institutions would have to make under the debt restructuring plan.

But two other bankers involved in the proposed restructuring noted that Sapura Energy’s debt burden will be cut from RM10 billion to RM5.2 billion after the restructuring exercise, which could take up to six months and must receive regulatory and shareholder approvals. 

FORMER STOCKMARKET DARLING

There was a time when Sapura Energy was the darling of the stock market. 

The result of a corporate merger in 2012 between two entities controlled by businessman Shahril Shamsuddin and Mahathir's second son, Mokhzani Mahathir, the company expanded rapidly and began spreading its footprint internationally, securing clients such as Petrobras of Brazil. 

At its peak, Sapura Energy ranked as the world's second-largest integrated oil and gas services provider after Saipem SpA of Italy.

Then came the collapse in oil prices in 2014, which hit the company that had built its rapid expansion on debt from local financial institutions. Financial losses began to pile up and, in 2017, Mokhzani sold his interest in Sapura Energy.

Shahril stayed on to lead the business but a financial turnaround eluded the company because of the high cost involved in servicing the group’s large debt burden.

As Sapura Energy’s financial woes deepened, PNB decided to increase its stake to 40 per cent in 2018, from roughly 7 per cent, when it subscribed to an issue of new shares in the company to raise additional funding. 

The PNB investment amounted to just over RM2.67 billion, but that has not been enough to stem the losses at Sapura Energy, setting the stage for last week’s financial rescue.