Malaysia: Pengurusan Danaharta Nasional Berhad

In January 1998, the Malaysian government established the National Economic Advisory Council (NEAC), a consulting body to the Cabinet, to propose a plan to address the economic and financial instability in Malaysia. The NEAC proposed the National Economic Recovery Plan (NERP), which was published in August 1998, with six objectives for economic recovery and financial stabilization. The plan included the creation of a national asset management company (AMC) and a special purpose vehicle (SPV) to recapitalize financial institutions. Danaharta was established as the AMC, and Danamodal was established soon after as the recapitalization SPV (Danaharta 2005).

In order to be eligible for capital injections, financial institutions were required to transfer their portfolios of NPLs to Danaharta. Danamodal followed the first-loss principle, which meant that the financial institution’s shareholders were required to absorb the first losses on the sale of assets to Danaharta. Danamodal only recapitalized viable financial institutions (BNM 1998a).

The government also established the Corporate Debt Restructuring Committee to facilitate debt restructuring negotiations. Danaharta, Danamodal, and the CDRC were overseen by a Steering Committee under the central bank, which coordinated the activities of the three agencies. Special funds were established to promote investment in priority sectors such as the Fund for Small and Medium Enterprises. The government announced a merger program for banks and finance companies in January 1998 to consolidate the banking industry, which was separate from the NEAC’s proposal, though the NERP did encourage consolidation (BNM 1998a). Figure 5 below shows the relationship between the agencies, banks, and borrowers:

Source: BNM 1998a.

The government announced the creation of Danaharta on May 20, 1998 (Danaharta 2005). Danaharta was established on June 20, 1998, and incorporated under the Companies Act of 1965 (Danaharta 1998a; 2005). Danaharta was granted its authority and special powers through the Pengurusan Danaharta Nasional Berhad Act (Danaharta Act), which was passed by the Malaysian Parliament in August 1998. In September 1998, amendments to the National Land Code Act and the Development Funds Act were passed by Parliament. The National Land Code (Amendment) Act of 1998 facilitated the implementation of Danaharta’s special authority (Danaharta 2005).

The Danaharta Act was amended by parliament on July 31, 2000. The amendments were intended to clarify existing provisions and solve problems that arose after Danaharta began operations (Danaharta 2005). The amendments included provisions regarding statutory vesting, sale by private treaty, legal actions against Danaharta, the Oversight Committee, and special administrators (Danaharta 2002).

Danaharta had special legal authority to manage and resolve NPLs. Danaharta could appoint a special administrator over borrowers unable to repay debts, bypassing court procedures. Furthermore, Danaharta could foreclose on a loan’s underlying property collateral and avoid court procedures, which expedited its operations. The act also granted Danaharta the ability to acquire assets through statutory vesting, which allowed Danaharta to “step into the shoes of the selling financial institution” in order to expedite the transfer and management of NPLs (Danaharta 2005). Danaharta’s legal authority enabled it to restructure loans in two to three months, rather than the standard fourteen to sixteen months under the Companies Act (Cooke and Foley). The Danaharta Act did not include provisions for pricing, financing, or eligible assets, which were to be determined by the Board and management (Cerruti and Neyens 2016).

Section 72 of the Danaharta Act prohibited courts from granting injunctions against Danaharta (Danaharta 2003). A borrower filed a legal suit against Danaharta in 2002, and the Court of Appeals declared that Section 72 was unconstitutional and void (Azmi and Razak 2014; Danaharta 2003). Danaharta filed an appeal against the ruling at the Federal Court, the highest court in Malaysia, arguing that the powers were constitutional and fair. The Federal Court unanimously decided that Section 72 of the Danaharta Act was constitutional and valid in January 2004 (Danaharta 2003). The Danaharta Act does not prevent parties from suing Danaharta or winning compensation as determined by the court (Danaharta 2002).

Danaharta’s primary objectives “were to remove the NPL distraction from the financial institutions and thereafter extract maximum recovery value from the NPLs” (Danaharta 2005).

When Danaharta was announced, the Managing Director, Azman Yahya, stated that he was confident that Danaharta would be beneficial for the Malaysian economy and allow financial institutions to return to “their vital role in supporting economic growth” (Danaharta 1998c). When the Danaharta Act was passed, it was framed as a “critical component in enabling Danaharta to undertake its unique mission” (Danaharta 1998d). The press releases related to Danaharta’s operational set-up emphasized its quick establishment relative to other countries (Danaharta 1998e), and the 1998 BNM Annual Report asserted that “[t]he speed at which Danaharta was set up and the financial commitment extended by the Government clearly demonstrated the serious intention of the Government to restructure and strengthen the banking sector” (BNM 1998a).

Azman emphasized that Danaharta’s ability to appoint special administrators could expedite resolutions and be a “win-win solution” for the involved parties (Danaharta 1999b). The government asserted that Danaharta would not become a bad-debt warehouse or a rapid-disposition agency; rather, Danaharta would focus on maximizing the recovery value of its portfolio of NPLs and minimizing the cost to the taxpayer (Danaharta 1999c). Though there were criticisms that Danaharta would be slow to resolve NPLs, Azman rejected the criticism and reiterated that Danaharta’s “role is to maximize recovery on [its] assets” (Lopez 1999).

The final report on Danaharta framed the creation of the body as a “preemptive measure” to address growing economic distress, as the establishment of Danaharta, Danamodal, and the CDRC was “the Malaysian Government’s pre-emptive strategy in accelerating the restructuring and strengthening of the financial system” (Danaharta 2005).

Furthermore, Danaharta claimed that it fought a public relations war as soon as it was established, as there were critics who believed Danaharta would bail out politically connected businesses. Others doubted that it would be transparent and free from political interference; furthermore, there was a common “misconception that Danaharta would forgive all NPLs” it acquired. Danaharta sought to combat public perception challenges through transparency in its operations, using frequent press releases and reports (Danaharta 2005). From the time of his appointment as the Managing Director, Azman committed to having “full disclosure and transparency” of Danaharta’s operations (Reuters 1998).

Danaharta was fully owned by the government, as the Minister of Finance Incorporated was the sole shareholder (Danaharta 1998b).^FNThe Minister of Finance Incorporated (MOF Inc.) is a Government-Linked Investment Company (GLIC) in Malaysia which was established under the Minister of Finance (Incorporated) Act in 1957. It functions as an investment holding company for the government, and the Act allows the Minister of Finance to be represented by the MOF Inc. and enter into business contracts, acquire companies, and manage assets.

The Minister of Finance oversaw Danaharta and its operations, as it was the sole shareholder of Danaharta. Danaharta had a nine-member Board of Directors, which consisted of representatives from both the public and private sector, which included a Chairman, a Managing Director (i.e., the CEO), two federal government officials, three individuals from the private sector, and two international members (Act 587). Azman Yahya, the Managing Director from 1998 to 2001, also served as the head of the CDRC (Danaharta 2005). Because Danaharta, Danamodal, and the CDRC played complementary roles, a Steering Committee was established to ensure coordination across the agencies which was chaired by the BNM Governor (Danaharta 1998a).

Source: Danaharta 2005.

The top-level management was divided into subcommittees which were overseen by the Management Executive Committee. The subcommittees evolved over the course of Danaharta’s operations. The Management Executive Committee oversaw the operations of Danaharta, determined guidelines for the operations, made key decisions, and ensured adherence to policies. Other committees included the Management Credit Committee, which was involved in the acquisition and disposal of loans; the Asset Management Committee, which reviewed and decided on the purchase and sale of property assets; and the Asset and Liability Committee, which controlled liquidity, market, and interest risks (Danaharta 2005). In 2003, Danaharta’s staff totaled 245 individuals (Danaharta 2003).

The Danaharta Act included a provision for the creation of the Oversight Committee (Act 587). This three-member committee was appointed by the Minister of Finance and tasked with the following functions: approval of special administrator appointments, approval of extension or moratorium periods for companies under special administrators, and approval of the termination of special administrators (Act 587). The Oversight Committee was established in November 1998 (Fung et al. 2003).

Danaharta established measures to ensure transparency of operations. Danaharta held press conferences, released public announcements, and maintained a public website. Danaharta published biannual operations reports, quarterly reports, and annual reports. Danaharta adopted the Malaysian Code on Corporate Governance which meant that it followed standards for professionalism and transparency. Danaharta also established the Danaharta Authority Manual which defined the responsibilities and authorities of the Board and management committees. Furthermore, the Risk Management team reviewed all proposals, and Danaharta was established with a structure to ensure that there was no single individual who could make a unilateral decision regarding the resolution of NPLs (Danaharta 2005).

Danaharta established KPIs internally in order to achieve its objectives during each phase of its operations; these phases were establishment, acquisition, and resolution. Danaharta linked staff remuneration to the achievement of the KPIs. Each KPI had a benchmark and a timeframe for achievement. The KPIs and the outcomes related to each KPI are in Figure 7 below:

When Danaharta was established, the Danaharta Act did not specify a size restriction that limited the amount of NPLs Danaharta could acquire. By the end of its operations in 2005, Danaharta had a total portfolio of RM47.68 billion—acquired assets totaled RM19.71 billion while it managed the remaining RM27.97 billion of its portfolio on behalf of the government (Danaharta 2005).

The government provided Danaharta with its initial capital of RM3 billion in. Danaharta borrowed from the Employees Provident Fund (EPF) and Khazanah Nasional Berhad to supplement its funding needs while waiting for the full capitalization. Danaharta borrowed a total of RM1.3 billion from the EPF and Khazanah Nasional Berhad over the course of its lifetime. Danaharta was also authorized to issue up to RM15 billion in zero-coupon, government guaranteed bonds in exchange for asset purchases (Danaharta 2005).

Danaharta also had access to a revolving credit facility from a consortium of banks which was established to provide short-term financing in the event of a cash shortage at the time of bond redemption (Danaharta 2004). Danaharta had access to RM1.4 billion in the revolving credit facility. Danaharta borrowed RM650 million from the revolving credit facility for the December 2004 and March 2005 bond redemptions, due to a mismatch between the cash flow and bond redemption. The RM650 million loan was repaid by September 2005 (Danaharta 2005).

Danaharta recognized a lifetime loss of approximately RM1 billion—which was borne by the government—when it ceased operations (Danaharta 2005).

Danaharta elected to issue domestic bonds to finance the purchase of NPLs. Danaharta considered an international bond issuance, but due to exchange rate uncertainty and volatility, it determined that an international source of funding would be costly. Thus, Danaharta issued domestic bonds directly to financial institutions as consideration for the transfer of NPLs. The bonds were government-guaranteed, zero-coupon bonds with a five-year maturity. Danaharta issued 15 tranches of bonds between November 1998 and March 2000, approximately one tranche per month. Danaharta raised a total of RM8.22 billion in capital from bond issuances; the total face value of the bonds was RM11.14 billion (Danaharta 2005). Figure 8 below shows the details of the fifteen bond issuances:

Source: Danaharta 2005, 54.

The bonds carried a zero-risk weight for banks for capital-adequacy purposes, and the bonds could be rediscounted with BNM under the central bank’s role as lender of last resort (Danaharta 1998a). The bonds could be traded on the secondary market. The bonds also had a rollover option, which allowed Danaharta to refinance the bonds upon maturity for one, three, or five years (Danaharta 2005).

All financial institutions were eligible to transfer assets to Danaharta. This included commercial banks, finance companies, development banks, merchant banks, Islamic banks, and locally incorporated foreign banks (Danaharta 2005). In order to be eligible for recapitalization by Danamodal, financial institutions were required to sell NPLs to Danaharta (BNM 1998a). BNM required financial institutions with an NPL ratio of 10 percent or higher to sell NPLs to Danaharta (Danaharta 2005).

Danaharta could acquire NPLs with a value of RM5 million or greater. The size criteria narrowed Danaharta’s operations and allowed it to focus on the higher value loans while addressing approximately 70 percent of the total NPL value in the banking sector. Danaharta estimated that the RM5 million target translated to 2,000 to 3,000 accounts, which it deemed “a manageable number for Danaharta to resolve the NPLs on a case by case basis” (Danaharta 2005).

Danaharta acquired assets during two purchase windows. The first purchase window, the “primary carve-out,” occurred between September 1998 and June 30, 1999. The objective of the first round of acquisitions was to “relieve the pressure on the banking system caused by NPLs”; thus, all financial institutions were eligible to sell NPLs to Danaharta during this window (Danaharta 2005). Danaharta announced that the acquisition would prioritize weaker financial institutions, such as those receiving capital injections from Danamodal, as well as those that were likely to sell NPLs to Danaharta (BNM 1998a). Financial institutions were able to decline Danaharta’s offers, and RM1.78 billion in offers were declined during the first window (Danaharta 2005).

The second purchase window, the “secondary carve-out,” occurred between July 1, 1999, and March 31, 2000. Danaharta established a more selective set of criteria for assets to be eligible for transfer, which included NPLs from borrowers already in Danaharta’s portfolio, NPLs from borrowers with a total value greater than RM50 million, unsecured NPLs to public companies, or NPLs from financial institutions with an NPL ratio higher than 10 percent (Danaharta 2005).

There were minor changes to Danaharta’s portfolio following the two purchase windows, as more managed NPLs were transferred to Danaharta. Danaharta returned a small quantity of acquired NPLs to the selling financial institution (Danaharta 2005). For example, in 2001, Danaharta returned 23 accounts totaling RM570.5 million to the transferring financial institution due to their failure to meet requirements in the acquisition agreements (Danaharta 2003).

Danaharta managed NPLs on behalf of the central bank and government for two defunct banking groups. Sime Bank reported massive losses in 1998 due to increased loan defaults, and BNM took over the bank in 1998. In order to facilitate a merger of Sime Bank with RHB Bank Group, another commercial bank, BNM carved out Sime Bank’s NPLs and moved them to Danaharta for management. Danaharta Managers Sdn Bhd (Danaharta Managers) was established and incorporated to manage the NPL portfolio from Sime Bank. Similarly, Bank Bumiputra Malaysia Berhad Group (BBMB Group), a government-owned banking group, reported large losses due to NPLs in 1998. BBMB Group was merged with Bank of Commerce (M) Berhad after its NPLs were transferred to Danaharta for management. In 1999, Danaharta Urus Sdn Bhd (Danaharta Urus) was created to hold the NPLs. Danaharta Managers and Danaharta Urus were fully owned subsidiaries of Danaharta (Danaharta 2005).

Unlike acquired NPLs, NPLs from BBMB Group and Sime Bank did not require payment from Danaharta to take over the management of the NPLs. However, Danaharta had to have legal ownership in order to use its legal authority to manage and resolve the NPLs. Thus, Danaharta Managers and Danaharta Urus issued zero-coupon bonds to Bank Negara Malaysia and the Ministry of Finance as consideration for the loans and redeemed them with the recovery from the respective loans. These bonds were different from the bonds issued by Danaharta to acquire NPLs from other financial institutions. The loan size restriction of RM5 million was relaxed for BBMB Group and Sime Bank. Danaharta managed loans with minimum value of RM1 million from the bank groups (Danaharta 2005).

In exchange for managing the NPLs from Sime Bank and BBMB for BNM, Danaharta received a management fee. If the recovery value was less than or equal to the net book value, Danaharta received 2 percent of the net recovery value. If the recovery value was more than book value, Danaharta received 20 percent of the excess recovery in addition to the 2 percent of net book value. After deducting management fees, the recovery on the management of these loans accrued to the government and BNM (Danaharta 2005).

BNM required every financial institution to submit details of its portfolio of NPLs with values of RM5 million and greater to Danaharta. Danaharta relied on the representations from the selling banks regarding the details of sold NPLs and included warranty provisions in the sales agreements. This allowed Danaharta to return NPLs to the selling financial institutions at a later date if the loan documentation was not in place (Danaharta 2005).

Danaharta determined the purchase price for NPLs depending on whether the loan was secured or unsecured. For secured loans, the purchase price was determined using the fair value of the underlying collateral. Danaharta only accepted property or shares as collateral. For property collateral, the fair value was 95 percent of the market value of the property, as determined by an independent appraiser. For NPLs backed by shares, the fair value was dependent on the size of the stake that the borrower held in the company, with premiums for larger stakes. The fair value was determined using the market price (MP), which was the lower of the three-month average price or the closing price at the point of purchase, and the net tangible assets (NTA) of the company based on its latest audited financial statements (Danaharta 2005). Figure 10 below shows the calculation of the fair value based on the percent stake in the company:

Danaharta then used the calculated fair value for secured loans backed by property or shares to determine the purchase price (Danaharta 2005). Figure 11 below shows the purchase price for various scenarios:

For loans with collateral whose fair value covered the principal, Danaharta fully compensated the financial institution for the principal amount as well as any accrued but unpaid interest, up to the calculated fair value of the collateral.

For loans with insufficient collateral, Danaharta used a novel method to allow selling financial institutions to avoid writing down losses at the time they sold NPLs to Danaharta. Upfront, Danaharta paid the fair value as calculated. However, BNM allowed the selling financial institution to record the sale at the principal amount outstanding. As noted, BNM then allowed financial institutions to write down the difference over five years, rather than immediately. Not everyone took advantage of this carrot, however. “As it turned out, many financial institutions preferred the more prudent route of immediately writing off the entire shortfall in value of NPLs sold to Danaharta” (Danaharta 2005).

For unsecured loans, Danaharta paid 10 percent of the principal amount of the loan, an amount that Danaharta called an “arbitrary figure.” Danaharta noted that this nominal valuation “worked because unsecured loans were typically given to public listed companies and usually some value could be derived from the company’s listing status” (Danaharta 2005).

For exceptionally large loans with a value of more than RM200 million, the purchase price was set at a nominal value equal to a percentage of the loan outstanding or RM1. This method was used if the valuation was “onerous or inconclusive,” and it was used infrequently as few NPLs were acquired using this method. (Danaharta 2005).

Though Danaharta had to generally acquire loans on a willing-buyer, willing-seller basis, it established an incentive and penalty structure, which included two incentives, or “carrots,” and two penalties, or “sticks,” to encourage financial institutions to sell NPLs (Danaharta 2005).

The incentives to sell to Danaharta included a profit-sharing arrangement and loss amortization. The profit-sharing arrangement allocated the surplus recovery from the management or disposal of NPLs in cases where Danaharta had paid the selling institution less than the principal amount outstanding. Eighty percent of the surplus recovery went to the selling institution, while Danaharta kept 20 percent. The surplus recovery was calculated by account. It was equal to the total recovery, less the amount of Danaharta’s upfront payment for the NPLs. Danaharta also deducted its direct costs relating to the recovery and any holding costs related to the assets. Because Danaharta paid up to the fair value in cases where the fair value was less than the principal outstanding, the surplus for the selling institution was capped at the difference between the principal outstanding and fair value (Danaharta 2005).

There were exceptions to the profit-sharing arrangement, such as in the case of exceptionally large loans. When Danaharta paid a nominal sum for the loan, 95 percent of the surplus recovery went to the selling institution while Danaharta kept 5 percent. If Danaharta paid a percentage of the principal outstanding for the loan, the transferring institution received 90 percent of the surplus and Danaharta received 10 percent (Danaharta 2005).

As a second incentive, participating financial institutions were allowed to amortize losses from the sale of NPLs to Danaharta over a five-year period. Financial institutions were required to write off 20 percent of the shortfall in the first year, and a minimum of 20 percent in each of the following years until the loan loss was written off . When Danaharta completed the resolution of the loan, the transferring institution was required to write off any remaining loss (Danaharta 2005).

Danaharta also imposed two penalties, or “sticks.” First, Danaharta provided financial institutions with only one opportunity to sell each NPL; any NPL the institution elected not to sell could not be sold to Danaharta at a later date. Danaharta also gave the financial institutions a limited timeframe to consider offers to drive efficiency and prevent price negotiation. If a financial institution decided not to sell an NPL to Danaharta, it was required to immediately write down the loan to 80 percent of Danaharta’s valuation (Danaharta 2005).

Danaharta evaluated the viability of a borrower’s business, and if the business was considered viable, the NPLs were addressed using the “soft approach” method. Danaharta’s soft approach—or loan management—included loan restructuring, loan settlement, and schemes of arrangement.^FNAs Malaysia does not have an equivalent of Chapter 11 bankruptcy, a court administered scheme of arrangement is an option for debt restructuring. Pursuant to the Companies Act, the scheme of arrangement requires the approval of the High Court. (See Options for Debt Restructuring in Malaysia for a brief explanation.) The goal of loan restructuring, which included the extension of repayment periods or rescheduling of loan payments, was to return the loan to a performing status. Every viable borrower was given one opportunity to restructure the loan in compliance with Danaharta’s Loan Restructuring Principles and Guidelines. These guidelines included measures to maximize recovery, minimize taxpayer burden, ensure equal treatment of stakeholders, and utilize Danaharta’s special powers. Danaharta also provided additional guidelines for corporate borrowers, individual borrowers, and guarantors. Loan settlement was another option for viable borrowers; these borrowers opted for an expedited settlement of the loans, usually within a year. Schemes of arrangement required agreement between creditors and borrowers and required court approval (Danaharta 2005).

For borrowers with non-viable businesses or for borrowers that failed to comply with loan restructuring, Danaharta’s resolution strategy, the “hard approach,” included the appointment of special administrators, foreclosure, legal action, or other resolution methods (Danaharta 2005).

Danaharta had the authority to appoint a special administrator over a corporate borrower, a subsidiary, a security provider, or a company whose shares Danaharta acquired, in the event that the borrower could not repay its loan (Danaharta 2005). The appointment of a Special Administrator effectively suspended the management and powers of the company’s Board, as the special administrator was the only party allowed to manage the company’s assets (Danaharta 2004). The Oversight Committee first approved the appointment of a special administrator. The special administrator assumed temporary control of the company under administration, and the company was automatically placed under a year-long moratorium which prevented creditors from taking action against the company. The special administrator prepared a workout proposal, which was reviewed for reasonableness by an independent advisor appointed by the Oversight Committee, and then approved by Danaharta. During the course of its operations, Danaharta appointed special administrators over 73 companies (Danaharta 2005).

Danaharta could foreclose on collateral if the borrower failed to repay its loan (Danaharta 2005). Danaharta was required to issue a 30-day notice to a borrower of its intent to foreclose and dispose of the property collateral if the borrower failed to repay the loan within the timeframe (Azmi and Razak 2014). Danaharta’s special powers for foreclosure allowed it to bypass court procedures. Because of statutory vesting, the borrower maintained the ownership of the collateral properties, though Danaharta ultimately sold the property (Danaharta 2005).

However, Danaharta owned the properties that were transferred to it as a form of loan repayment. Danaharta adopted the open-tender approach to sell properties. Properties put up for tender were required to have their current value listed publicly, in addition to a confidential reserve price to prevent fire sales. Danaharta recruited real estate agents to assist with marketing properties nationally. Prospective buyers could reference the latest valuation report of the property, the sale and purchase agreement, and terms and conditions of the sale before placing a bid. Buyers received a stamp-duty waiver for all properties bought from Danaharta. Danaharta also provided financing at competitive rates for the first seven tenders and promised vacant possession of the property. The properties were promised to buyers free of encumbrances within nine months of the signing of the sale and purchase agreement or the buyer could terminate the sale. At the close of each tender exercise, the bids were collected by a Tender Committee, which was composed of senior management at Danaharta not involved in the tender process. The winning bids were presented to the Tender Board, which was comprised of the Managing Director of Danaharta, another Danaharta representative, an appraiser, and a representative from the government’s Foreign Investment Committee. Only the agent whose client successfully won the bidding received a commission on the sale. Overall, Danaharta paid approximately 5 percent of the sale proceeds for agency fees and marketing costs (Danaharta 2005).

Legal action against a borrower was the “last resort” option for Danaharta, after it had attempted the other strategies. This was not a preferred resolution method due to the extensive time and monetary commitment and the minimal recovery value. Other methods included partial resolution, company liquidation, or the appointment of receivers or managers over a company or assets (Danaharta 2005).

Danaharta did not exclude foreign loans in its acquisition of eligible assets. Foreign loans included those that were non-Ringgit loans or marketable securities extended to or issued by foreign companies. The majority of these loans came from Sime Bank, Sime Labuan, and BBMB. For foreign loans and marketable securities, Danaharta determined that the best method to recover underlying value was to dispose of the NPLs for cash or swap for domestic debt, as Danaharta’s special legal authority did not apply to foreign loans (Danaharta 2005).

Danaharta elected to use the restricted-tender exercise to dispose of foreign loans. International banks that expressed interest in purchasing the foreign loans were invited to participate; participants were divided into Principal Bidders, who could bid on loans and securities, and Marketable Account Bidders, who could bid only on marketable securities. Danaharta held four restricted-tender exercises, with a total offering of 110 accounts with principal of $743.32 million (RM195 million). In total, Danaharta sold 85 accounts for $631.84 million, at an average recovery of 48 percent (Danaharta 2005).

Danaharta owned and managed a portfolio of securities that included irredeemable, redeemable, and convertible securities. Danaharta acquired these securities in cases where loan settlements were made using securities. Irredeemable securities included ordinary shares and irredeemable convertible loan stocks. Redeemable securities included secured loan stocks, unsecured loan stocks, and preference shares. Convertible shares were loan stocks and preference shares that were convertible to equity shares. Danaharta disposed of shares if the share price exceeded a predetermined target price. However, if the target price was not met, Danaharta used tender exercises for controlling blocks of irredeemable securities, market mechanisms for non-controlling blocks of irredeemable securities, and redemption of redeemable securities to dispose of the securities in its portfolio. Danaharta sold readily tradable securities through stockbrokers or financial institutions. For securities subject to call and put options, the decision to dispose was governed by its specific call and put option agreement (Danaharta 2005).

Danaharta adopted asset-backed securitization (ABS) as a method to expedite the recovery on restructured loans. Danaharta transferred a portfolio of loans and cash, valued at RM595 million, to an SPV, Securita ABS One Berhad, in exchange for cash and subordinated notes from the SPV. The portfolio included RM579.2 million in loans, a discount of RM1.5 million, and RM14.7 in reserve funding. On December 20, 2001, Danaharta issued RM310 million AAA-rated senior notes with a maturity of December 2005 and coupon rate of 3.75 percent. The senior notes were issued at 99.54 percent of par value, and the response to the issuance was positive with orders totaling over RM1 billion. Danaharta assumed the RM285.4 million unrated tranche of subordinated notes, which meant it would absorb any shortfall up to RM285.4 million. Danaharta raised RM308.57 million from the issue. Securita ABS One began redeeming the senior notes in stages from May 2003 to June 2004 and completed redemption eighteen months ahead of schedule, including RM18.4 million in interest costs. Danaharta only did one ABS exercise because the alternate recovery options “were generating cash well enough to retire Danaharta’s bond on time.” Danaharta’s ABS issuance was the first occasion of a collateralized loan obligation (CLO) transaction in Malaysia (Danaharta 2005).  

At the time of its establishment, Danaharta did not have a predefined sunset date. In the 1998 BNM Annual Report, it was estimated that Danaharta’s lifespan would be between seven and ten years (BNM 1998a). However, by 2001, Danaharta set a target to wind down by the end of 2005 (Danaharta 2001). Danaharta ceased operations on December 31, 2005, and transferred remaining cash to the Ministry of Finance (Danaharta 2005).  

Danaharta projected that a total of RM2.88 billion in residual recovery assets would remain by December 2005. The residual recovery assets were transferred to the Minister of Finance Incorporated, for conversion to cash beginning January 1, 2006. The Minister of Finance Incorporated designated Prokhas Sdn Bhd (Prokhas), a fully owned subsidiary, as the collection agency for the remaining residual recovery assets. Thus, the ownership of the assets remained with Danaharta, which became a dormant company, until the completion of recovery (Danaharta 2005).