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Osram's exit from RM2bil Kedah project unlikely to have major impact on PNB, EPF and KWAP

Publish date: Thu, 16 May 2024, 10:57 AM

KUALA LUMPUR: Any grim outcome from Austrian-German company AMS Osram AG's decision to pull out from a RM2 billion semiconductor project in Kedah has been dispelled.

Some analysts believe there is unlikely to be harsh financial consequences on the three major funds that have committed RM2 billion to the project.

The funds are Permodalan Nasional Bhd (PNB), the Employees Provident Fund (EPF) and Retirement Fund Inc (KWAP).

They said Osram will honour its financial obligations to the institutions according to the sale and leaseback agreement signed about six months ago.

Tradeview Capital Sdn Bhd chief executive officer Ng Zhu Hann said it appears that the three major institutions have started providing funds for the construction.

"The first phase used some of the earmarked investment funds estimated at US$1 billion multi-year, multi-stage investment. The current building represents the first phase of that investment. This is based on public information." 

He said further investment may not be needed due to the sudden change in the business direction by Osram, as far as the new facility is concerned.

"Based on the agreement between the three major institutions and Osram, there is unlikely to be any financial impact. 

"In the worst-case scenario, where Osram fails to find a third party to take over its lease, Osram will continue to honour its financial obligations to PNB, EPF and KWAP as per the agreement and service its lease agreement with the three institutions," he added.

The deal was supposed to have been concluded in December 2023, with Osram to lease the facility from them.

Two weeks ago, Osram announced that it would write down its micro LED operations after losing a key customer, presumably Apple, which had previously committed to making substantial pre-payments.

Corporate finance expert David Singh said the project has started and Osram had indicated that many other keen parties are eying the asset in Kulim.

"However, it is too early to make any call, and it is best to let things take their course. The sale-leaseback deal must have been favourable for Osram, as it provides cash-flow injections in light of its poor credit ratings and heavy capex commitments." 

As of March 14, Osram's stock was traded at 1.3 euros, tumbling from its high of 37 euros in early 2018.

"This is a good example of why parties' credit risk must be evaluated diligently and taken into consideration when structuring deals," David said.

Meanwhile, Ng said the current status of the sales and lease agreement between the three entities and Osram is that the project is expected to proceed as planned, regardless of whether Osram uses the facility.

"Failure to honour the agreement would likely result in a termination penalty. However, since the facility is custom-built for Osram, finding another tenant may be challenging and time-consuming. 

"The responsibility for this lies with Osram, not with the three major funds involved."

Ng said the project has indeed started. 

This co-investment model, aimed at attracting foreign direct investment, represents a significant positive shift from past practices.

However, Osram's failure to fulfil its obligations may impact future co-investment and sale-leaseback projects involving these institutions, added Ng.

'Business Times' has reached out to PNB and EPF spokespersons on Tuesday for comments.

Penang Institute economist and socioeconomic researcher Doris Liew said should Osram encounter challenges in finding a successor lessee, the parties may engage in discussions to explore alternative solutions. 

"These could include extending the lease term, renegotiating the terms of the agreement, or devising a contingency plan to ensure the continued operation and maintenance of the facility. Such proactive measures would aim to uphold the financial stability and viability of the investment for all stakeholders." 

She said while Osram's struggles have raised concerns, its commitment to meeting financial obligations offers reassurance regarding the investment.

David also said whether Osram intends to proceed with its 8.0-inch LED manufacturing facilities is irrelevant. 

It is obliged to pay for lease money for the next 10 years with a clear exit strategy embedded for EPF and its co-investors, he added.

"Osram is rated 'BB-' by both S&P Global and Fitch Ratings. This implies that the investment by EPF and co-investors is risky and well below investment grade, unless some form of credit enhancement is incorporated with the deal," he said.

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