Posted by: Financial Sith Lord | December 3, 2009

Possible solution for Malaysian Government’s dilemma in buying Eurocopter choppers despite tight budget.

Today, on the news, I saw Malaysia’s Prime Minister Dato’ Seri Najib Tun Razak visiting the LIMA 09 (Langkawi International Maritime & Aviation Exhibition). He was greeted there by the organizers, as well as given a tour to various exhibitors, including Eurocopter. The news also showed his comments during a press conference. He mentioned that the Royal Malaysian Airforce’s plans to purchase Eurocopter choppers to replace the existing Sikorskys (dubbed ‘Nuri’) were put on hold due to the country’s financial condition. He further stressed that the purchase plan was fully justified and there’s no doubt that Malaysia intends to proceed with the purchase once its finances improves.

With that, my head began to ponder. Actually, the Eurocopter purchase, which involves an estimated sum of RM 1.2 billion, could still be done without burning the nation’s finances. As a matter of fact, if done correctly, Malaysia would not even have to fork out a single cent for it, well, at least initially. There is no question that Malaysia would still have to pay for the purchase but the cashflow could be well-managed, up to an extend that it would not be drastically effecting the financial equilibrium of the country.

Through proper and well structured debt and project financing, the deal could still go through. This is how it can work.

First, the Malaysian Federal Government (MFG) would have to issue a Federal Guarantee of an amount of RM 1.5 billion (approximately 5% of the country’s cash reserves), to be issued by the Central Bank of Malaysia (BNM) with the beneficiary being Malayan Banking Berhad (MBB). MBB then issues a banker’s guarantee to Eurocopter for the purchase. Eurocopter will obviously opt to obtain a cash advance from the BG from their bankers. Thus the BG is being discounted at 80% (or RM 1.2 billion). Hence, they get their money.

As for the repayment for MBB’s BG exposure, the MFG shall repay MBB via tax deductions as well as cash payments derived from cutting a small portion of the defence budget, for the next say 10 years. In totality, MBB would probably gain approximately between RM 300 – 500 million in profits (assuming that they structure the deal under Islamic Finance).

This way, everybody is happy. The MFG is happy that they could still purchase the choppers, even under tight financial budget and using deferred payment scheme, Eurocopter is happy because they get their sales amount in full, the Malaysian Air Force is happy as they get to replace their defunct Sikorsky Nuri choppers and perhaps saving many of their future pilots’ lives, and MBB is happy as they get their profits from the MFG. BNM is happy as well as the Federal Guarantee will duly be returned once the amount to MBB is fully paid off by the MFG and Malaysian Airforce.

How about that!!!??

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Responses

  1. Dear Financial Sith Lord,

    your suggested structured financing mechanism may actually work. It would not pose any burden whatsoever to the budget in other sectors of government expenditures. I commend your repayment mechanics (tax rebates and installment deductions of defense annual budget) is darn good. Keep up the good work. One day, the government might just take your advise!!..

  2. But the guarantee is still a contingent liability on the government.

    • Yes, but currently the Malaysian Government’s liquidity is extremely tight. The proof is that many government related projects are delaying payments to contractors, which chokes national financial liquidity. So obviously, the liquidity is the issue. When liquidity is an issue, the Government will find it hard to raise cash financings from other banks except for Malaysian Banks.

      Banks being themselves, obviously they would want a more solid collateral in comparison to guarantees for them to grant a cash facility, as it involves inter-bank loans for such facility. But in the case of issuing a guarantee, the bank does not have to expose itself to financial obligations as yet, as it is deferred on the account of the receiving discounting bank.

      Overall, the purchase of the Eurocopters are no doubt, is a form of liability to the government. Unlike purchasing land asset that appreciate in value, this purchase is a machinery based, thus it involves depreciations and devaluations. But the whole purpose of purchasing the Eurocopters are to replace the existing Sikorsky choppers that had taken many Malaysian lives, whereas it was suppose to save many lives in search and rescue ops. However, this liability is credit in nature thus, would only be reflected in the government’s P&L. It would not worsen the existing liquidity.


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