EPF to lend RM5 billion to Valuecap is to invest in the stock market or pay his debt

State investment company Valuecap Sdn Bhd owes its three shareholders RM5.1 billion, which is due to be repaid in February 2009.

This debt, in the form of interest-bearing unsecured bonds, raises questions over plans for the Employees Provident Fund to lend RM5 billion to Valuecap to invest in the stock market.

In March 2003, Valuecap borrowed RM5.1 billion from shareholders Khazanah, Kumpulan Wang Amanah Pencen and Permodalan Nasional Bhd to invest in the stock market. At the time, world stock markets were bracing for a looming war in Iraq which followed on the September 2001 attacks on the US.

Valuecap’s bonds were due to be repaid in February 2006, but the company was given another three years to this coming February. At the end of 2006, the three shareholders each held RM1.7 billion in these bonds, according to documents obtained by The Malaysian Insider.

Since these debt instruments were not listed and are not tradeable, the three shareholders are probably still holding these bonds today.

Recently, the government proposed that EPF lend Valuecap RM5 billion to invest in the stock market. In view of its impending obligation to repay its shareholders, however, questions arise over whether the loaned funds will be used to redeem the bonds.

As at the end of 2006, Valuecap’s investments were valued at RM4.8 billion. Since then, the stock market has lost 21 per cent of its value. If Valuecap’s investments have tracked the stock market, these could be worth RM3.8 billion currently.

Valuecap may have managed to unwind some of its positions when it launched a RM840 million Islamic investment fund earlier this year. Called myETF Dow Jones Islamic Market Malaysia Titans 25, the fund is managed by a wholly-owned subsidiary, iVCAP Management Sdn Bhd.

At the end of October, the fund's value was 41 per cent lower than at its launch in January this year.

Market observers have speculated that this was Valuecap’s version of Hong Kong’s Tracker Fund, which the Hong Kong government launched in 1999 to unwind US$15 billion (RM52.5 billion) worth of stock positions accumulated during the 1997 Asian financial crisis. The fund concluded the disposals of almost the shares by the end of 2002.

Current market conditions make it difficult, if not impossible, for Valuecap to unwind its positions.

If it is unable to sell its stock market investments, it may repay its shareholders in kind, transferring its share portfolio to them instead of coughing up cash.

If it did so, the EPF loan would provide fresh cash to make new investments. If its shareholders require to be repaid in cash, however, Valuecap may need the cash infusion from EPF.

The company has been servicing the interest on the debt. It has also established a sinking fund to set aside funds to repay the debt. As at December 2006, the sinking fund stood at roughly RM780 million, and it held RM1.7 billion in cash and deposits.