It is easy to understand why gaming mogul Tan Sri Lim Kok Thay has decided to put Genting Hong Kong Ltd (Genting HK) under liquidation.

Under pressure from creditors, including financial groups in Germany, and operating in uncertain conditions due to the pandemic, it is easier to opt for a voluntary liquidation. It would buy the tycoon much needed space and time to consolidate the cruise business.

On the face of it, Genting HK filing for liquidation in the Bahamas and for the shipyards in Germany may suggest that it is game over for Lim. But in reality, it is far from over for the 70-year-old magnate, who is one of the richest men in Asia.

In fact, it is the start of a new era for him, where he gets to woo his creditors with a fresh deal. As things stand, they may not have many options to maximise their recovery besides considering what the controlling shareholder of the Genting group has to offer.

Genting HK has assets of well over US$5 billion (RM21 billion), which is double its borrowings that are in default. So, if anybody is expecting distressed sales of Genting HK’s asset fleet, it is not likely to happen.

Lim’s passion for entertainment and gaming on cruise ships goes back to the early 1990s. The group had sold its interest in a casino in the Caribbean and Lim wanted to invest the money in Carnival Corporation Ltd.

His father, the late Tan Sri Lim Goh Tong, was not keen on the cruise business. Carnival went on to become the largest cruise operator in the world with a market capitalisation of US$22 billion, which is more than five times the valuation that Genting Bhd commands today.

In 2000, Lim led the takeover of Norwegian Cruise Line (NCL), which Genting HK subsequently sold in stages beginning with a 50% stake to private equity groups in 2008. The private equity firms listed NCL in 2013 at a valuation of US$3.4 billion.

Genting HK reaped handsome returns of more than US$1.5 billion from the eventual disposal of NCL shares, which prompted the group to take over the German shipyards in 2016 for €230.6 million (RM1.1 billion at that time). Genting HK’s group president Colin Au stated then that the shipyard acquisition was to ensure that Genting HK had control of the manufacturing of cruise ships when demand was high.

But the pandemic has hit the cruise industry the hardest, and owning the German shipyards proved to be Lim and Genting HK’s Waterloo. To keep the business afloat, Genting HK needs to increase its borrowings.

The German authorities and financial institutions had asked for additional terms, including guarantees from Lim as the controlling shareholder of Genting HK, in return for extending additional lines of credit. The guarantee would have had to come from Lim and some members of his family.

As Genting HK could not meet the demands and the Germans did not provide the financing, its wholly-owned shipbuilding subsidiary MV Werften Holdings was pushed into liquidation. The developments in Germany caused a cross default of Genting HK’s borrowings amounting to US$2.8 billion.

Genting HK has filed for provisional liquidation in the Bahamas and appointed liquidators to see through an orderly restructuring designed to

position the company as a going concern. The company stated that it could involve a compromise or the disposal of certain assets to maximise value for shareholders and returns to creditors.

Most of the group’s existing operations will cease during this liquidation period. Only some businesses such as those under Dream Cruises would continue in order to protect the core assets and maintain the group’s value.

Unlike the Star Cruises and Crystal Cruises brands of vessels that are wholly controlled by Genting HK, the Dream Cruises ships are 35% owned by private equity funds. Genting HK only holds about 65% in Dream Cruises, which has three operating ships and another two that are being built in Germany.

Lim holds 75% of Genting HK through Golden Hope Ltd, which is the trustee for Golden Hope Unit Trust. Lim and some

members of his family are beneficiaries of the trust, which means that they are heavily invested in the cruise business that the tycoon manages together with Au.

The best part of the liquidation of Genting HK is that it has assets in the form of the ships, aircraft, land and shipyards in Germany. Based on the figures in its 2020 annual report, the estimated recoverable amount from the cruise ships, aircraft and German shipyards is more than US$5.7 billion.

The total borrowings of the group as at the end of June last year are US$3.9 billion, out of which the default amount is about US$2.8 billion.

The recoverable amount stated in the annual report is arrived at after taking into account the possibility of lower revenue, lower profitability and the deferred commencement of its cruise operations until the end of this year.

Based on the asset size, the liquidators’ task ought to be straightforward as the value of the assets to be recovered is significantly higher than the borrowings. But in reality, it will not be an easy process because determining the price of the ships and getting suitors is key.

Moreover, Genting HK’s liquidation was initiated by the company itself and not its creditors. As such, the assets cannot be sold at distressed prices.

The price of each of the vessels will be difficult to determine. Even the Global Dream ship, which is 75% completed, has a price tag that is estimated at US$1.8 billion.

As for suitors, there are not many owing to the tough nature of the business.

First, almost all cruise companies have geared up, paying up to 11.5% in coupon for debt papers. The yields on the debt papers are so high that these papers are considered as junk bonds. With the

pandemic still lingering, not many have the financial muscle to take on more assets.

Second, there is so much uncertainty in the cruise business. The landscape has changed, with customers preferring shorter cruises with fewer people on board. Genting’s ships, meanwhile, are designed to accommodate a large number of passengers to achieve better economies of scale.

For instance, the Global Dream is designed to accommodate a record 9,500 passengers, with 2,200 crew members. In comparison, the second largest cruise ship can take only up to 6,680 passengers.

Finally, 90% of the cruise business is dominated by three US-based companies that operate in the Americas, North America and Europe. These companies have not ventured into Asia because of the different landscape and customer demands in this market.

In comparison, Genting HK’s cruise ships are designed for Asian cruises where the climate is warmer, cruise days are shorter and there is a tendency for some passengers to spend more time at gaming machines on board than anything else.

Now that the liquidators have been appointed, there will be a long period of negotiations between the creditors and liquidators. There could be a disposal of some assets but, by and large, the company should remain intact without much change to the shareholders and management.

This has happened before when creditors were at the mercy of companies that were too large to disintegrate.

For instance, the Lion Group’s battle with creditors goes back to the 1998 financial crisis. Creditors could not take control because there was no entity prepared to take over the core assets. Creditors did not have many options and had to let the owners dispose of the assets over time.

Until today, its assets are still being disposed of but the core steel manufacturing plants are still with the group.

M Shanmugam is a contributing editor at The Edge