By Khairie Hisyam
Self-styled strategic development company 1Malaysia Development Berhad (1MDB) transferred US$850 million (RM3.7 billion at today’s exchange rates) to an offshore company that was set-up to appear as a subsidiary of its business partner International Petroleum Investment Company (IPIC), the Wall Street Journal (WSJ) reported today.
Citing wire documents it sighted and sources familiar with the matter, WSJ said the US$850 million went via three transactions to a British Virgin Islands-registered company called “Aabar Investments PJS Ltd”, which bears close resemblance to an IPIC subsidiary called Aabar Investments PJS.
However, the actual IPIC subsidiary is Abu Dhabi-registered. In turn, the British Virgin Islands-registered company was incorporated on March 14, 2012 and liquidated on June 23, 2015, said WSJ.
The discovery deepens a mystery surrounding some US$2.4 billion 1MDB said it paid to IPIC as part of the latter’s involvement in 1MDB’s acquisition of power assets in 2012 and 2013. In September this year WSJ reported that IPIC did not receive the funds, citing sources familiar with the matter.
To recap, 1MDB issued two US Dollar-denominated bonds totalling US$3.5 billion in 2012 to finance its acquisitions. IPIC co-guaranteed the bond issuances and received US$1.4 billion as refundable security in return.
Another concession granted to IPIC for its co-guarantee were 10-year options for its subsidiary Aabar Investments PJS to acquire up to 49% equity in 1MDB’s power assets. These options were later extinguished for a total of US$993 million, according to 1MDB’s books.
However IPIC’s latest available financial statement published on Dec 8, 2015, made no reference to the US$1.4 billion amount and stated that 1MDB still owed the company some US$481.3 million (RM2 billion) as at June 30, 2015.
The uncertainty regarding the payments allegedly made to IPIC comprises part of a wider controversy surrounding 1MDB, which has amassed some RM42 billion in borrowings since it was incorporated that it is struggling to repay.
Part of its rationalisation plan, rolled out in February this year by new chief Arul Kanda, involves selling its power assets and monetising its property development projects.
On Nov 23, 2015 1MDB inked a sale agreement with China General Nuclear (CGN) Group, a Chinese state-owned entity, to sell its entire power assets for RM9.83 billion. The price is believed to be 25% higher than roughly RM8 billion submitted by a competing bid from Malaysia’s largest power producer and sole distributor Tenaga Nasional Berhad.
The deal with CGN is expected to cut 1MDB’s debts by some RM17 billion, which includes assumption of associated debts amounting to RM8 billion or so by CGN.
At present 1MDB is finalising the selection of a winning bid to buy 60% equity in its Bandar Malaysia development. It has not indicated an intention to divest a portion of equity in its wholly owned Tun Razak Exchange (TRX) development.
Also part of 1MDB’s plans to rationalise debt is a deal with IPIC vis-a-vis a binding term sheet which was signed on May 28, 2015 by IPIC, 1MDB, Aabar Investments PJS and the Ministry of Finance, sole shareholder of 1MDB. At the time Second Finance Minister Ahmad Husni Hanadzlah said the deal will reduce 1MDB’s debts by RM16 billion.
Among others, the deal will see IPIC extend US$1 billion in cash to 1MDB, which 1MDB will use to repay the US$975 million loan. This cash provision is not a loan, said 1MDB president and group executive director Arul Kanda previously.
IPIC will also assume all interest payments under the two bonds amounting to US$3.5 billion, which it co-guaranteed, from June 4, 2015 onwards. It will also receive a transfer of assets equivalent to US$1 billion in value by June 30, 2016, after which it will directly take liability for all payment obligations under the two bonds as well as forgive certain financial obligations of 1MDB towards it.
IPIC is an Abu Dhabi government investment vehicle set up to invest in energy and energy-related industries globally.
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