Last year was the end of an era for Malaysia's power industry. 2001 saw a series of power project financings culminating with the RM1.5 billion Islamic bond and CP/MTN program for Malakoff's GB3 project (see below). For the next two years, possibly longer, Malaysian power projects will be few and far between ? in fact, non-existent for greenfield projects. Bankers involved in the Malaysian project finance business are now having to concentrate resources on other industries, particularly telecoms.

Malaysian power projects never provided opportunities for the broader international project finance industry since almost all financings are denominated in Malaysian Ringgit. But going forward, opportunities will be even more limited as sufficient generating capacity has been or is already being built to meet Malaysia's near term electricity requirements.

At the start of this year it was anticipated that two greenfield power projects would need financing in the next 12 months, notes Murray Ashdown, head of project finance at HSBC's Singapore office: the 2100MW Pulau Bunting project sponsored by SKS Ventures and YTL's 1400MW Jimah Power development. However these projects, plus the redevelopment of Tenaga Nasional's Port Dickson plant, have been put on hold because of low electricity demand growth. Tenaga Nasional, the country's transmission and distribution monopoly, has slashed its forecast for electricity consumption growth this year from 9.4% to just 5%.

If financing for deals is required in the power industry it will be for mergers and acquisitions. But there are conflicting reports about whether Tenaga will sell stakes in power generating companies YTL Power, Port Dickson and Genting Sanyen. Even if the company does sell, the stakes that Tenaga owns in these assets are small and are unlikely to be financed with project debt. Tenaga owns just 4.5% of YTL and 20% each in the other two assets.

More promising, a Hong Kong based utilities analyst believes that M&A activity among local independent power producers is likely to intensify as existing IPPs are finding it difficult to sustain earnings growth without new generating capacity. ?I think there's going to be a change of strategy for Malaysian IPPs whereby they try and grow earnings through acquisitions,? says the analyst. YTL, Malakoff and Powertek are thought to be the most likely buyers. Banking sources suggest that SKS Ventures may be acquired by Malakoff late this year or next year since they have common controlling shareholders.

Telecoms beckons

The telecoms sector, on the other hand, is still expected to generate significant opportunities for foreign banks in 2002 and 2003. With five major players, Malaysia's mobile telecoms industry is complex particularly compared to the duopoly market in the Philippines, but it has also been the source of robust growth over the last five years. The figures below illustrate:

Cellular Subscribers in Malaysia

(in thousands):

1996 1997 1998 1999 2000 2001

Market Subscribers EOY 1,443 2,122 2,133 2,988 5,249 7,562

Growth Rate 47% 5% 40% 76% 44%

Source: Global Mobile

According to various industry analysts, growth has been accelerating, especially over the last 12-18 months, and several industry experts following the market forecast that Malaysia will now enter the period of exponential growth seen in many other markets. Most industry experts project market penetration to reach 45%-50% in the next four to five years. This growth is expected to be driven by a young Malaysian population subscribing to prepaid services.

There are rumours in the bank market that monthly growth (in terms of total new subscriptions) might have slowed down slightly with the increase in penetration level ? the 2001 subscriber total of 7.562 million represents a penetration level of 32.3%. ?While the market growth in terms of net new additions appears to be slightly slowing down, I still think that growth will continue strong in the near term. Malaysia is not even close to saturation point, yet,? says Vesa Tontti, assistant vice president at Citibank.

?The challenge with Malaysia,? says Tontti, ?is that, unlike in many other countries, Malaysian mobile operators are not obligated to provide their official subscriber numbers to the regulator and there is no uniform treatment of when a subscriber is considered disconnected. Consequently there is a fair amount of deviation in total market size and market share estimates depending on who you ask.?

According to another banker, the number of operators is also a concern to international banks. This is not the case in neighbouring Philippines where the dynamics of a market are relatively easily understood. The five operators in the domestic mobile market are listed below:

Date Market Total Primary

first Share Subscribers Network technology

Operator licensed 12/00 (Dec 2000) Coverage (bandwidth)

TM Touch/ 1987 18% 952,585 50% GSM1800

Telekom Malaysia (25Mhz)

TRI Celcom 1994 29% 1,530,681 >70% GSM900

(GSM) (15Mhz)

Maxis 1993 27% 1,440,800 >70% GSM900

(15Mhz)

Time 1994 8% 399,647 <50% GSM1800

(25Mhz)

DIGI 1995 18% 925,074 >70% GSM1800

(25Mhz)

However Tontti says: ?while there is a clear number one and number two operator [Maxis and Celcom], they are not in an absolutely dominant position. All four leading operators have their individual strengths and weaknesses. Yet, their overall competitive strength is not dramatically different, which facilitates an environment that can support multiple profitable players over a longer period of time. Having said that, everyone is expecting some consolidation, especially as the government is only awarding three 3G licenses.?

Of the mobile operators listed above, only Time dotCom would find it difficult to raise funding for network expansion at the present time, says a banker in Kuala Lumpur. ?That's not so much a function of its relatively small market share as of the broader restructuring going on at the Time Engineering group which involves the sale of its stake in Time dotCom.?

Another banker says that Telekom Malaysia may buy the stake in Time dotCom. The two telecoms companies already have common shareholders in Khazanah Nasional. But this move would surprise analysts who have been expecting Telekom Malaysia to acquire Celcom. Telekom Malaysia's courtship with TRI Celcom began back in 1998 but an acquisition did not go through at that time because of an inability to agree on pricing. ?The most widely expected buyer of Time dotCom is Maxis, rather than Telekom Malaysia,? the banker says.

One telecoms project financing is in the market currently, for DIGI. Unlike the power project deals, most mobile telecoms financings in Malaysia are banking rather than capital markets transactions. The DIGI deal, led by Credit Agricole Indosuez, IntesaBci, JP Morgan and SG, involves a RM700 million equivalent international tranche and a RM300 million local tranche (led by Arab Malaysian Merchant Bank, Commerce International Merchant Bank and RHB Bank). Godwin Chang at SG's export finance department in Hong Kong notes that the deal is a true project finance transaction, contrasting with many other Malaysian telecoms deals. ?Its been structured this way because the size of the network increase which is to be financed is substantial relative to the size of DIGI's existing network,? says Chang.

Tenor for the DIGI deal is reported to be seven years. Fees are described as ?thin? by the bankers involved. Upfront fees are 65bps for $15 million and 50bps for $10 million. Tranche A of the foreign currency loan (covered by EKN) carries a guarantee fee of 100bps, the clean B tranche carries a guarantee fee of 200bps down to 150bps.

The lead banks report strong interest from international institutions largely because of Telenor's increased stake in the venture. Chang says Telenor increased its shareholding in DIGI to 61% (the maximum allowed under Malaysian law) from 33% on September 14, last year. Additionally, Malaysia does not have the same exposure concerns for either foreign banks or export credit agencies compared with other Asian telecoms markets. This is because Malaysia has a vibrant local bond market and there has not been as much need for foreign debt. Responses from the bank markets were due in as Project Finance went to press.

Maxis, meanwhile is mulling options for a refinancing of a $735 million bridge loan and $200 million in vendor financing. The telecoms operator also plans an IPO in May or June this year, says a banker in Singapore. Maxis aims to raise about RM2.5 billion through the equity markets and has appointed ABN Amro and ING Barings to manage the offshore listing and RHB Sakura Merchant Bankers and Commerce International Merchant Bankers to manage the domestic listing. The company would be the last of the five mobile telecoms operators to list. Proceeds from the listing, says the Kuala Lumpur source, will be used to expand Maxis' network.

The bond market

Traditionally the key source of Malaysian project funds has been the local bond market. ?The bond market was hit at the start of the year by a sell-down in Malaysian Government Securities (MGS) which has caused yields to widen by about 50bps to 60bps,? says Jason Kho, in Deutsche Bank's capital markets team in Kuala Lumpur. The sell-down was a result of the central bank's decision to relax the minimum amount of MGS held by insurance companies.

In recent weeks, there has been some recovery in pricing, but pricing is nowhere near to what it was last year. Liquidity is still there, it is just being channeled into better credits.

For power deals specifically, a number of local institutions are almost full on exposure to the power sector, says Kho. But power companies aren't likely to face a liquidity problem, either, this is more of a pricing issue.

Pahlawan Power, a subsidiary of Powertek issued RM450 million of Islamic bonds, led by Commerce International Merchant Bankers on January 31. The issue had nine tranches with tenors from two to 10 years. The coupon ranges from 5.05% to 6.90%.

Nevertheless, if the decision to put on hold the Pulau Bunting and Jimah Power projects is reversed in the light of improved electricity demand, Ashdown speculates that it would be difficult to in the Malaysian bond market given their size, particularly if the financings are concurrent. He estimates that the two projects will need financing for RM5 billion and RM7 billion respectively. ?The alternative,? says Ashdown, ?would be to tap the bank market for a portion of the total funding need. Here there would certainly be appetite because syndicated loans have long been neglected as a source of funds for Malaysian power projects.?

Compared with the power sector, which has tapped the bond market on a regular basis in recent years, telecoms-related bond financings are uncommon in Malaysia. Chang thinks DIGI could tap the bond market if it wished to but bond specialists in Kuala Lumpur suspect the pricing would be unattractive.

All things being equal, consolidation will help the industry's credit standing and enhance mobile operators access to the bond market. As one analyst comments, ?the Malaysian cellular phone market suffers from too many competitors and substandard earnings. The operators are focused too much on marketing and promotions rather than network services and quality and this leads to relatively high churn rates.? Over the last two years, average return on equity and return on capital employed for the telcos has been only 7% and 9% respectively.

The drivers for consolidation are several ? the limited number of 3G licenses, intense competition and thin margins, Telecom Malaysia's desire to acquire another player because of frequency limitations for its mobile subsidiary TMTouch, and government pressure on incumbents to look for M&A partners.

Also, the analyst says that TRI Celcom is in the middle of a debt restructuring plan and is looking for an equity injection from strategic investors in order to complete its refinancing. TRI has debts of nearly RM4 billion and has until April 22 to redeem its $375 million eurobond issue.