Is PN17 an end-game?

Is PN17 an end-game?

BASED on statistics provided by Bursa Malaysia, there are presently some 25 companies that are categorised under the Practice Note 17 (PN17) of the Main Market Listing Requirements (MMLR) and two companies under the Guidance Note 3 (GN3) of the ACE Market Listing Requirements (AMLR).

Investors who have been in the market long enough would probably remember that the PN17 classification is similar to how distressed companies were classified under Practice Note 4 (PN4) before.

PN4 companies were mostly shunned by investors back then as there is little hope of revival among these companies as most of them could only sustain their listing status if a white knight emerges via a reverse take-over (RTO), or risk being delisted.

What is PN17 or GN3?

PN17 and GN3 addresses situations when a company has triggered one or more of any of the following six prescribed criteria under Para 2.1 of PN17 of the MMLR:

(a) the shareholders’ equity on a consolidated basis is 25% or less of the share capital and is less than RM40mil (for MMLR);

(b) receivers or managers have been appointed on its subsidiary or associated company which accounts for at least 50% of the total assets employed on a consolidated basis;

(c) a winding-up of a listed issuer’s subsidiary or associated company which accounts for at least 50% of the total assets employed on a consolidated basis;

(d) the auditors have expressed an adverse or disclaimer opinion in the listed issuer’s latest audited financial statements;

(e) the auditors have highlighted a material uncertainty related to going concern or expressed a qualification on the company’s ability to continue as a going concern in the company’s latest audited financial statements and the shareholders’ equity is 50% or less of the share capital of the company;

(f) default in payment by a listed issuer, its major subsidiary, or major associated company, and the listed issuer is unable to provide a solvency declaration to the exchange.

For ACE-listed companies, GN3 has two additional criteria’s whereby a listed issuer will be classified as an affected issuer, which is related to situations whereby an ACE market-listed issuer has incurred losses.

However, due to the pandemic, Bursa Malaysia, as part of its relief measures, has allowed listed companies that have triggered the PN17 criteria a relief from complying with the obligations under the listing requirement for 18 months if criteria (a), (e) or (f) are triggered but not for criteria (b), (c) and (d).

This is for a listed issuer that had triggered the suspended PN17 or GN3 criteria between April 17 2020 and June 30 2021.

After the 18-month window, a corporate ought to reassess its condition whether it continues to trigger the PN17 criteria or otherwise, and if does so, it will be admitted as a PN17 or GN3 affected listed issuer.

Out of the 27 companies that are either under the PN17 MMLR or the GN3 of AMR, four of them were admitted in January 2022 itself.

This includes Serba Dinamik on Jan 6 as their external auditors expressed a disclaimer of opinion in the company’s audited financial statements and hence the PN17 Para 2.1(d) of the MMLR was triggered.

This was followed by AirAsia Group (AAG) on Jan 7, as the 18-month relief measure window expired. AAG had triggered the Para 2.1(e) of PN17 on July 8, 2020, when auditors had expressed an emphasis on matter in relation to the company’s going concern on the company’s audited financial statements for FY2019; and Para 2(a) of PN17 as the shareholders’ funds was only at 37% of its share capital as at March 31 2020.

There were two additional PN17 companies added to the PN17 list last month and they include Jerasia Capital, which triggered PN17 Para 2.1(a) on Jan 28, 2022, and Top Builders Capital (formerly known as Ikhmas Jaya Group) on the same day.

In Jerasia’s case, the company had triggered Para 2.1(f) in August last year and this was followed by Para 2.1(e) in early November 2021 but was not classified under PN17 as yet due to the relief measures that were granted to all issuers.

For Top Builders, the 18-months relief period granted to the company was exhausted and its application for a further extension was rejected. Top Builders had triggered Para 2.1(a) and 2.1(e) on June 30, 2020.

As can be seen from the various examples, typically although there are six to eight prescribed criteria’s when a listed issuer may end up triggering Para 2.1 of PN17 or MMLR GN3 of the AMLR, in most cases, it is likely to be Para 2.1(a) or 2.1(e) under the MMLR or Para 2.1(a) or 2.1(g) under the AMLR.

How do companies fall into PN17?

In general, most companies fall into PN17 upon reporting huge losses as auditors complete their annual financial statements statutory audit of a company.

Typically, these losses are not operational related but due to impairments carried out on certain assets. This includes trade receivables, inventories, or even assets or investments carried in the books which perhaps do not reflect the current economic value or are unrecoverable.

Impairments of current assets held by a company is a reflection of the previously reported financial performance of these corporates as they may have reported inflated earnings by bumping up revenue, which had previously resulted in sustained increases in either receivables or inventories or both.

Operation wise, a company too could fall into PN17 if losses in a given year are so huge that it could impact the shareholders’ equity and trigger the Para 2.1(a) of PN17 or GN3 as the case may be.

In addition, auditors play an important role in determining the trigger points as both Para 2.1(d) and Para 2.1(e) of PN17 and Para 2.1(f) and Para 2.1(g) of GN3 are related to the opinion of the auditor on the financial statements that are presented.

Getting out of PN17

A listed issuer is given a 12-month window (before the relief measure) from the date of their respective first announcement is made to submit a regularisation plan, very few companies are able to do get out of the situation in such a short time.

In fact, most of them take years, and in some cases, due to failure to regularise its financial condition, suspension of trading and delisting procedures follows thereafter.

Presently, out of the 27 companies under PN17/GN3, six companies have been suspended including Serba Dinamik, which was suspended due to Bursa Malaysia’s action following the company’s failure to submit the Special Independent Review report.

Typically, companies have two choices to get out of PN17 and among them are:

> If there is no change in the core business activity – a corporate restructuring exercise involving a capital reduction, followed by a share consolidation exercise and a fundraising exercise via a rights issue and or placement of new shares;

> If there is a change in core business activity – a RTO exercise whereby a new company is injected into the listed entity via issuance of new shares of the PN17 company.

Typically, the listed issuer would also undertake a corporate restructuring exercise involving a capital reduction, followed by a share consolidation exercise and a rights issue to existing shareholders, and or private placements of new shares too.

In both of the above circumstances, if the listed issue is also saddled with a huge debt, a PN17 listed issuer may also undertake a scheme of arrangement where creditors will take a haircut or in certain cases convert them into equity.

A long road ahead

Based on the 27 companies that had triggered Para 2.1 of PN17, eight companies have been under the PN17 spell for the longest time.

They include one listed issuer who has been under PN17 since December 2014, which is more than seven years now, while three others have been under PN17 or GN3 for more than four years.

Four others have been under the PN17 or GN3 classification between three to four years and ten others between two to three years.

The fact that a company once classified as PN17 finds it hard to get out of it is a reality and this could either be due to lack of potential RTO candidates or the capital reconstruction exercise is not feasible for the shareholders to undertake as the company’s financial mess is beyond rehabilitation.

Hence, while PN17 may not be an end-game for listed issuers as there are avenues for an affected issuer to regularise their financial condition, time is of the essence.

The longer it takes to regularise its financial condition, the less likelihood that a listed issuer will be able to get out of it as the risk of delisting looms. Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

https://www.thestar.com.my/business/business-news/2022/02/05/is-pn17-an-end-game