By Khairie Hisyam
Putrajaya has committed to making good 1Malaysia Development Bhd (1MDB)’s commitment in its recent transaction with International Petroleum Investment Company (IPIC), which saw the later provide billions in early June to repay some debt.
A filing to the London Stock Exchange (LSE) stated that both 1MDB and its sole shareholder Ministry of Finance (MOF) have agreed to “perform the obligations contemplated in the binding term sheet and to indemnify IPIC and Aabar for any non-performance, and vice versa”.
Dated June 10, 2015, the filing disclosed terms of a binding term sheet signed by IPIC, its subsidiary Aabar Investments PJS, the Minister of Finance Incorporated, Malaysia (MOF Inc) and 1MDB on May 28, 2015.
Following the agreement, IPIC extended US$1 billion to 1MDB on June 4 to repay a US$975 million (RM3.57 billion) loan from an international banking consortium that was demanding payment four months ahead of a September 2015 repayment date.
Other terms of the binding term sheet stipulate that from June 4 onwards, IPIC will assume all interest payments due under two 1MDB loans amounting to US$3.5 billion, which were guaranteed by IPIC.
IPIC is also to receive a transfer of assets equivalent to US$1 billion in value by June 30, 2016, after which IPIC will directly take liability for all payment obligations under the two 1MDB loans as well as forgive certain financial obligations of 1MDB to IPIC.
In a statement today, Petaling Jaya Utara member of parliament Tony Pua said through the deal the Malaysian government has provided a guarantee of US$4.71 billion (RM17.7 billion) to IPIC. “In the event 1MDB is unable to fulfil its obligations to transfer assets worth the same value to IPIC by 30 June 2016, the Government will indemnify IPIC by assuming the obligations.”
‘Not a guarantee’
In a separate statement, 1MDB has denied that the government provided any guarantee for the transaction between the company and IPIC.
Stating that the government did not guarantee either of the two 1MDB bonds guaranteed by IPIC, 1MDB claimed it is irresponsible for Pua to have suggested that the binding term sheet led to “further guarantee obligations” by the government.
“It is public information that the Government has only issued a ‘letter of support’, and this was for a different US$3 billion (approximately RM11.35 billion) bond issued by 1MDB,” said 1MDB today. “In total, the Government has only provided explicit guarantees for RM5.8 billion of 1MDB debt.”
The company further said Pua is deliberately misleading the public by failing to mention “and vice versa” in the clause, which meant the indemnity insofar as the performance of obligations are concerned applies both ways.
“Such a two-way indemnity is a standard clause in commercial transactions to ensure neither party is ‘out of pocket’ for non-performance by the other. 1MDB confirms that it fully intends to perform its obligations under the binding term sheet,” said 1MDB today.
The transaction, first announced to the public by Second Finance Minister Ahmad Husni Hanadzlah on May 29, is part of the MOF’s rationalisation for 1MDB and is expected to reduce 1MDB’s debts by some RM16 billion.
As of April 30, 2014, 1MDB had some RM42 billion in borrowings and roughly RM51 billion in assets, according to documents lodged with the Companies Commission of Malaysia.
RM36 bil to save 1MDB?
The RM17.7 billion guarantee effectively takes Putrajaya’s commitment to saving 1MDB to a total of over RM36 billion, claimed Pua.
In his statement, Pua added up a previous loan by the MOF to 1MDB amounting to RM950 million; two letters of support for 1MDB to raise loans amounting to US$3 billion (RM11.25 billion) and US$150 million (RM540 million) in May 2013 and March 2015 respectively; and existing guarantees of RM5.8 billion for 1MDB loans to reach that figure.
“This has outstripped Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) which is backed by RM29.2 billion of government guarantee as the single highest recipient,” said Pua. “This discovery is shocking as it will increase Malaysia’s contingent liability which stands officially at RM157.5 billion as of 31 December 2014, by more than 11%.”
“The Prime Minister must immediately explain the shocking development, the massive guarantee and effectively another attempted multi-billion ringgit bailout of 1MDB,” said Pua further.
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