KUALA LUMPUR • 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.
The record sell-off 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 is only part of Mr Lim's sinking empire amid the Covid-19 crisis.
His casino-to-hospitality conglomerate Genting and its units had their first-ever groupwide salary reductions earlier this year, and his Genting Malaysia said in June it was cutting thousands of jobs.
"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 Mr 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 six 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 shares, or 32 per cent of his holdings, compared with 70 million a year earlier, according to the company's annual reports.
Genting shares closed down 6.1 per cent to RM3.57 yesterday. Malaysian markets were shut for a holiday on Thursday, when shares of Genting Hong Kong plunged by a record 38 per cent. Genting Hong Kong shares recovered some of their losses yesterday, 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$958.4 million) excluding pledged shares, down from US$1.5 billion at the beginning of the year, according to Bloomberg Billionaires Index.
Mr Michael Melbinger, a Chicago-based partner at Winston & Strawn who specialises 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 service firms that offer cash in exchange for committed stock.
Tesla's Mr Elon Musk, SoftBank Group's Mr Masayoshi Son and Oracle's Mr 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 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 pushes 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 technology to 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 the 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 dropped 1.2 per cent yesterday, and RHB Bank, which slid 1.6 per cent.
Genting Malaysia, which operates a casino and resort outside of Kuala Lumpur, slumped as much as 6.1 per cent.
Citigroup sees low risk of Genting group companies bailing out the Hong Kong cruise firm, though there is "some reputational damage", according to a note.