Singapore’s Temasek Courts Disaster
The bull market tide goes
out, leaving the lion city’s sovereign wealth firm gasping on the
shore
Nearly five months after its March 31 year-end, Singaporeans
should be eagerly looking forward to the publication of the report
of the guardian of so much of the national wealth, Temasek
Holdings. The sovereign wealth fund run by Ho Ching, wife of Prime
Minister Lee Hsien Loong, is not the biggest repository of money
collected by the state on behalf of the people, but it is at least
semi-transparent compared with its big brother the Government
Investment Corp.
The lengthy wait for results could possibly be connected to
issues of how to treat a series of rather spectacular disasters
that Temasek faced last year, and that are continuing into the
current year.
Even in 2006-07, when world
markets were booming in unison, Temasek had to report a 29 percent
profit fall. Neither chairman S. Dhanabalan nor Ho Ching were on
hand at the press conference when these dismal results were
delivered. So who will deliver any bad news for the latest
year?
Of course, the bottom line for the year to March 2008 may be
saved by the sale just before year-end of power station Tuas Power
to China’s Huaneng Group for S$4.2 billion which should enable it
to book a hefty capital profit. But selling local assets and buying
foreign ones may not be such a smart idea, particularly if you are
the kind of Singapore bureaucrat who has implicit faith in the
masters of the universe on Wall Street.
Under Ho Ching’s leadership
Temasek had supposedly been taken from being a safety-first
bureaucracy to a smart, profit-oriented outfit, selling some assets
and investing heavily overseas, particularly in the fast-growing
emerging markets of Asia and Latin America. Almost fool can make
money in a global bull market so for awhile Temasek seemed to
prosper under Ho Ching’s dynamic leadership. But Temasek also
swallowed plenty of bait on offer from Wall Street types.
In particular the
government-owned investment vehicle vastly expanded its finance
sector portfolio, buying banks and even setting up a Special
Purpose Vehicle, Astrea, which borrowed US$810 million to invest in
a slew of private equity and buyout funds.
It is hard to imagine that Astrea has avoided the hammering
suffered by almost all buyout and private equity funds, some of
which have had to close with large losses.
But Temasek seems to have
compounded bull market errors by continuing to have faith in Wall
Street deceptions when memory of the Asian crisis and the Japanese
experience should have made it particularly aware that
financial-sector problems almost always go deeper and last longer
than those in other sectors. Temasek was keen to show how important
it was so was among the first to jump in with equity bail-outs for
distressed western banks, firstly with US$5 billion for Merrill
Lynch at $48 a share.
The Merill shares are now worth about half that, and although
under the terms of the deal Temasek has been partially compensated
with additional shares it has had to also to put in new money – and
must wonder just how long and deep the US financial crisis will be.
Although it had recently increased its stake in the UK’s Standard
Chartered, it also put ₤1 billion into Britain’s Barclays, a
financial institution whose equity base remains perilously small
compared with the weight of assorted instruments it carries and
whose share price has fallen much further since the Temasek
injection.
But it is not just the finance sector and in the west that
gung-Ho Temasek has hit rough waters. The Shin Corp mess in
Thailand may now be a thing of the past. But troubles elsewhere are
many. In Indonesia it is being required to sell off its stake in
Bank International Indonesia (BII) because it already owns Bank
Danamon. But Malaysia’s Bank Negara (central bank) has vetoed an
attempt by Maybank to buy the BII stake. Bank Negara evidently
agreed with opinion in the market that Maybank was offering a silly
price.
The best piece of luck Temasek has had was actually evidence of
its own willingness to pay top dollar. Only the myopic greed of
shareholders in China Eastern Airlines and hopes of a counter offer
from China National Aviation Corp thwarted a generous joint offer
by Temasek and Singapore Airlines for a 24 percent stake in the
Hong Kong-listed company at HK$3.8 a share. They now trade at
HK$1.80.
Real estate is not looking too hot either. Last month
CapitalLand (part of the Temasek group) had to promise to inject
A$300 million into its ailing listed Australian 54 percent owned
subsidiary Australand Property. Without a huge capital injection,
deeply indebted Australand might have gone under.
Temasek has also leaped heavily into one of China’s highest
profile, and perhaps more vulnerable, property developers, Country
Garden. When it went public in Hong Kong in April 2007, Country
Garden was the second largest IPO in Hong Kong history, with
Temasek joining local tycoons Lee Shau Kee and Robert Kuok as key
investors. According to the mainland financial magazine Caijing, a
subsequent S$800 million convertible bond issue in Singapore in
February this year was made on terms which suggest the company is
very stretched and badly needs to keep its share price from
falling. It is now little more than half its initial price and down
75 percent from its peak.
Australia, once seen as a safe if unexciting location for
Singapore cash, has also attracted top of the market deals from
Singapore Power. Already well-established in Australia, it paid
heavily in cash for the eastern Australia assets of pipeline
company Alinta but with values in decline they have been unable now
to flip them into their 51 percent owned local subsidiary SP Ausnet
leaving SP meanwhile saddled with huge borrowings.
Even on home ground, things are looking sick for important parts
of the Temasek empire. Chartered Semiconductor Industries has seen
its shares fall more than 40 percent and its debt ratings have been
cut so that its bond are no longer investment grade – otherwise
known as junk status. Chartered has long been a state effort to
make Singapore a semiconductor manufacturing leader but has never
managed to keep up with the likes of Taiwan and Korea in technology
and now also faces Chinese competition.
These various problems have not entirely dulled Temasek’s
appetite for acquisitions. Its associate Neptune Orient Lines (NOL)
is bidding to buy Germany’s Hapag-Lloyd just at a time when some
commentators forecast huge problems looming for container lines.
This time Temasek may be saved by German nationalism – Hamburg
business is ganging up to keep it in local hands.
It remains to be seen who,
if anyone, takes responsibility for Temasek’s blunders. Last year
it was chief investment officer Jimmy Phoon who found he had better
things to do, as did Jackson Tai at DBS, Temasek’s main banking
investment, and the finance director of SembCorp who had landed the
group with US$300 million in foreign exchange losses.
Meanwhile US former food and consumer products executive Simon
Israel, appointed two years ago, remains CEO in conjunction with Ho
Ching. And, despite everything, faith in Wall Street types is as
strong as ever – Michael Dee from Morgan Stanley was last week been
appointed managing director for international investments.
