KNM down on financing concerns

by Jose Barrock
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KUALA LUMPUR: Fast-expanding oil and gas player KNM Group Bhd continued to slide, shedding 25 sen yesterday to close at RM5.10 on concerns of its proposed exchangeable bond issue, in the current difficult period. At its lowest in intra-day trading, KNM fell to RM4.96.

The company’s shares were among the most active with 11.9 million shares traded. Since end- May this year, the company’s share has tumbled by about 27% and during the period in review, under-performed the sluggish Kuala Lumpur Composite Index by 13.5%.

According to Goldman Sachs, the dip in KNM’s shares is a result of fears as to whether the company’s proposed exchangeable bond issue will proceed, with the current weak market likely to be a dampener. KNM had taken a €350 million (RM1.8 billion) bridging loan to finance the acquisition of German-based Borsig Beteiligungsverwaltungsgeselschaft mbH, last month, and has since partially pared down some of these loans, by utilising proceeds from a RM1.1 billion one-for-four rights issue, which was completed end of last month.

KNM had proposed raising another US$350 million (or its equivalent) in exchangeable bonds to settle the remaining amount of the outstanding debts taken for the purchase.

Goldman said that checks with the company revealed that in line with the widening global credit spreads the indicative yield for their proposed exchangeable bond has risen by 100 bps to 4.8% now (30%-35% conversion premium) against the existing bridging loan’s 5.2%.

“Given the significant increase, KNM is exploring other options, including the possibility of issuing plain vanilla debt, which the company says has indicative yields of 5.5%-6%,” Goldman Sachs says in report recently.

The research house stated that KNM may launch the exchangeable bonds when market conditions improve and that it views the alternative plan positively.

Foreign funds such as FMR LLC and FIL Ltd have been trading KNM’s shares heavily, which could explain its high trading volumes. The two funds emerged as substantial shareholders in end July last year, with 5.2% or 54 million shares. Since then, the funds have upped their shareholding to above 10.7% or about 141.4 million shares.

Another fund, which has been actively trading KNM’s stock, is the Employees Provident Fund (EPF). The EPF has about 6% in KNM now.

Early last week, about 11 million shares in KNM were traded off market in 22 block trades of above half-a-million shares crossing at RM5.85 a share. This occurred in about a 10-minute span of time in the later part of morning trade.

For its first three months of FY08, KNM posted a net profit of RM54.1 million on the back of RM331.2 million revenue. In contrast to a year ago, net profit improved by about 41%, while revenue increased 26%.

In a short span of three years, KNM has grown to become one of the top oil and gas players providing a wide spectrum of services. In March this year, the company proposed to buy the German-based Borsig to expand its reach in Europe.