Published November 29, 2008

IOI aborts proposed purchase of Citicorp Tower

By S JAYASANKARAN
IN KUALA LUMPUR
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ANALYSTS have applauded plantation and property company IOI Corporation's decision to walk away from a RM756 million (S$316 million) purchase of a building in Kuala Lumpur. Even so, the firm was re-rated downwards by Fitch Ratings for wholly different reasons.

On Thursday night, IOI told the stock exchange that it was pulling out of its proposed purchase of Citicorp Tower from three vendors - Citicorp (50 per cent), Singapore's CapitaLand (30 per cent) and Malaysia's Amsteel (20 per cent).

Aborting the deal will cost IOI RM75 million in forfeiture fees. But analysts said that it was better to walk away now, given that the company could very probably pick up property assets at much cheaper rates going forward.

In fact, they compared IOI's decision with Maybank which went ahead with its over RM7 billion purchase of Bank International Indonesia which most analysts agreed was overpriced. 'RM73 million is nothing compared with its (IOI's) cash flows,' said one analyst who tracks the firm closely. Still, the firm said that it was seeking legal advice on the propriety and quantum of the forfeiture.

IOI's decision reflects the company's recognition of the worsening economic outlook and the need to conserve cash and reduce borrowings at a time when commodity prices are falling. Ironically, it was for those same reasons that Fitch downgraded the stock. But it will be bad news for the company: analysts estimated that its funding costs could go up by at least 50 basis points.

The agency yesterday downgraded the firm's bonds to 'BBB+' from 'A-' because a rise 'in its business risk stemming from significant investments in property that is not expected to contribute to cash flows over the short to medium term'.

Fitch cited, in particular, IOI's luxury condominium projects in Singapore and IOI's overly generous returns over the last 18 months to shareholders (RM3.2 billion), both of which had increased its debt load. The firm has delayed the launch of its first development phase in Sentosa.

Fitch said that IOI's debt is now RM4 billion - up sharply from about RM400 million last year - and could get worse as cash flows from its plantation, property and refining arms weaken. Still, the agency tempered its downgrade by tacking on a 'stable' outlook to the firm's rating in a nod towards its superior management.