Lim Kok Thay just pledged his shares, should you sell your Genting shares?

According to Singapore’s Straits Times, Lim Kok Thay, head-honcho of the Genting Malaysia Berhad. just pledged all his shares in Genting Hong Kong Limited, his cruise ship business, to guarantee loans. Straits Times has also pointed out he has pledged 32 per cent of his holdings in Genting Malaysia Berhad.

What does this mean for you, if you’re an investor?

Should you invest in companies whose owner/founder have pledged their shares to guarantee their company’s loans?

Aside from the fundamentals of investing in a cruise ship business right now (or a company that has openly declared a moratorium on paying its creditors), a dangerous investing situation arises when a founder/majority owner pledges their shares to guarantee company loans. If the stock price of the company continues to fall, the bank lenders might force-sell the pledged shares, triggering a wave of selling that might trigger a sudden downward spiral of the stock price.

I experienced this personally in the case of KNM Bhd, the Malaysian oil services company, listed on Bursa Malaysia. I had initially enjoyed supra-normal stock price returns from 2006 to 2008, but the stock then suddenly started tanking mid-2008. I found out from my broker later that this was due to KNM’s banks force-selling the pledged shares of the founder. I wish I had known of this pledging arrangement earlier, it certainly ratcheted the stock price downwards suddenly. Thankfully, I managed to sell the stock early enough to obtain a decent return, but I lost about one year’s worth of appreciation.

Sources told me that this happened to My E.G Bhd too in May 2018 when disastrous election results for Barisan Nasional triggered a share price drop for MyEG, which opened the threat of forced selling by banks on shares pledged by the founder.

Although, as an entrepreneur, I will resist pledging my shares in my company to guarantee a bank loan, sometimes, we do not have a choice. To obtain growth capital from banks, we will be asked to pledge our shares so that our company will be given loans. And if things go to plan, it is not an issue. Loans get paid back and our shares get unpledged.

But if things do not go to plan, then the entrepreneur runs the danger of losing control of her company. And the investor risks losing his shirt.

So when you see an owner/founder of a public company pledge her shares to guarantee her company’s loans, you should think about heading for the exit door.

#investing #genting #financialwellness #notsyariahcompliant