KUALA LUMPUR (BLOOMBERG) - Malaysian tycoon Lim Kok Thay has pledged nearly his entire stake in embattled cruise operator Genting Hong Kong as collateral for loans, raising the risk of a margin call after the stock plunged on Thursday (Aug 20).
The record selloff came after the company said it suspended all payments to creditors in a bid to maintain its critical services. As of Thursday, the stock had lost almost two-thirds of its value since December, and that’s only part of Mr Lim’s sinking empire amid the Covid-19 crisis. His casino-to-hospitality conglomerate Genting Bhd and its units had their first-ever group-wide salary reductions earlier this year, and his Genting Malaysia Bhd said in June it was cutting thousands of jobs.
The Hong Kong cruise firm is linked to Genting Bhd through its chairman Mr Lim, who owned 69 per cent of the Hong Kong unit’s shares as of April 3.
“The likelihood of other units being asked to help out Genting Hong Kong is low as each listed entity is closely regulated by its respective regulator,” said Tushar Mohata, head of research at Nomura Malaysia. But investor concern about the effects on other companies in the group will remain because of the Covid-19 pandemic and a history of related-party transactions in the group, he said.
Mr Lim has been pledging more of his holdings as the shares have plunged. Almost all of his 76 per cent stake in Genting Hong Kong is now committed - or 6 billion shares, according to a stock exchange filing at the end of last month - up from 5.5 billion shares in April. As of March, he had also pledged 550 million of his Genting Bhd shares - or 32 per cent of his holdings - compared with 70 million a year earlier, according to the company’s annual reports.
Genting Bhd shares closed down 6.1 per cent to RM3.57 yesterday (fri). Malaysian markets were shut for a holiday on Thursday, when shares of cruise operator Genting Hong Kong plunged by a record 38 per cent. Shares of Genting Hong Kong recovered some of their losses yesterday (fri), closing up 5 per cent at 39 Hong Kong cents.
Shares of Genting Singapore, which operates Resorts World Sentosa in Singapore, closed up 0.5 cent or 0.7 per cent at 69.5 cents.
Mr Lim’s own fortune is now valued at about US$700 million (S$956.8 million) excluding pledged shares, down from US$1.5 billion at the beginning of the year, according to Bloomberg Billionaires Index.
Michael Melbinger, a Chicago-based partner at Winston & Strawn who specializes in executive compensation, said the case illustrates exactly why companies should limit share pledging.
“Many companies hit a bump in the road causing a sudden decline in stock price,” Mr Melbinger said. “That happens. However when this bump causes the most significant shareholder and director of the company to have to sell shares, or a margin call automatically triggers the selling, the problem becomes much, much worse.”
Pledging shares is not unusual, especially in Asia, where high-growth companies are more common and tycoons often turn to lenders and other financial-services firms that offer cash in exchange for committed stock. Tesla’s Elon Musk, SoftBank Group’s Masa Son and Oracle’s Larry Ellison have also relied on the practice to get loans, which are typically a fraction of the value of the pledge.
But in times of hardship, pledging can backfire. Executives might have to increase collateral to meet the banks’ margin calls, and in some cases may even need to liquidate their assets at depressed prices. The risk to the market, in turn, is that the forced sales push the stock even lower.
Mr Lim has overseen the Genting empire since taking over in 2003 from his father, who started the business as a hill resort in Malaysia in 1965. While the coronavirus pandemic has boosted many fortunes from the tech and pharma industries, tourism and casino companies have suffered amid lockdown measures and travel curbs.
UOB Kay Hian expects Genting Hong Kong to reach a pragmatic deal with creditors and get additional financing to stay afloat in interim, analysts Vincent Khoo and Jack Goh wrote in a note. The cruise operator would eventually be able to issue new debt or equity at high interest costs or significant discounts, they said.
The cruise operator’s syndicated debt includes loans by Malayan Banking, which fell as much as 1.8 per cent on Friday and RHB Bank, which slid 1.6 per cent. Genting Malaysia Bhd, which operates a casino and resort outside of Kuala Lumpur, slumped as much as 6.1 per cent.