Issues unresolved as 1MDB nears RM41 bil debt shave

By Khairie Hisyam

As 2015 comes to a close, self-styled strategic development company 1Malaysia Development Bhd (1MDB) has just managed to squeeze in one final deal, which advances its debt rationalisation efforts yet another step forward.

This brings the company’s tally of major deals under its debt rationalisation plan to three – a white-knight deal with a International Petroleum Investment Co (IPIC) in end-May, full disposal of its power assets in end-November, and the divestment of 60% equity in its Bandar Malaysia development project via a deal inked on the last day of the year.

Taken together, these deals may resolve 1MDB’s debt conundrum or at least come very close to it. An interesting light is cast on the timing of the Bandar Malaysia divestment by a statement from embattled Prime Minister Najib Abdul Razak on June 14, 2015 that 1MDB issues will be fully resolved within six months.

As at March 31, 2014 (FY14), 1MDB has some RM42 billion in borrowings and about RM48 billion in liabilities, according to its annual accounts. In comparison, across the three major deals 1MDB may have managed to reduce its debts by as much as RM41.2 billion, according to rough KINIBIZ calculations, which nearly matches its total borrowings as at FY14.

Najib told Bloomberg that this reduction is some RM40.4 billion, however. In any case, these do not take into account potential increases in 1MDB’s borrowings since then as FY15 accounts, originally due by Sept 30, 2015, are not yet available.

And advances on the debt rationalisation front contrasts starkly with relative lack of progress in terms of accountability issues – relatively scarce answers have been forthcoming in terms of 1MDB’s questionable dealings in the past, which have directly led to the company being in its current predicament.

The IPIC ‘white-knight’ deal

First up was 1MDB’s arrangement with IPIC, which was announced on May 29, 2015. This deal was said to help 1MDB shed an overall RM16 billion in debt, according to Second Finance Minister Ahmad Husni Hanadzlah at the time.

According to a regulatory filing to the London Stock Exchange (LSE) in June 2015, Ipic gave US$1 billion in cash to 1MDB following the deal, an amount which is neither a loan nor a bailout, said 1MDB president and group executive director Arul Kanda.

This US$1 billion was used 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 are that from June 4, 2015 onwards, IPIC will assume all interest payments due under two 1MDB bonds amounting to US$3.5 billion, which IPIC co-guarantees for 1MDB’s power asset purchases between 2012 and 2013.

After IPIC receives a transfer of assets equivalent to US$1 billion in value by June 30, 2016, it will then directly take liability for all payment obligations under these two bonds. IPIC will also forgive certain financial obligations of 1MDB to it.

Notably the LSE filing further states that both 1MDB and its sole shareholder, the Finance Ministry (MOF), agreed to “perform the obligations contemplated in the binding term sheet and to indemnify IPIC and Aabar for any non-performance, and vice versa”. In other words, the government will fulfil the terms if 1MDB is unable to.

The Edra and Bandar Malaysia deals

In less than two months before 2015 ends, 1MDB announced another two major deals with a combined value of more than RM17 billion which also significantly chips away at its debt pile.

On Nov 22, 2015, 1MDB announced that it has selected a bid from China General Nuclear Power Corp (CGN Group) amounting to RM9.83 billion in cash for its entire power assets, held under Edra Global Energy.

The bid edged out a competing submission by local energy sector powerhouse Tenaga Nasional Bhd, said to be in the region of RM8 billion. Slated for completion in end-February 2016, the deal will also see CGN assume associated debt of about RM8 billion.

Effectively, this means another RM17.83 billion off 1MDB’s borrowings of RM42 billion as of FY14, assuming the entire cash proceeds from the Edra Global Energy sale go towards debt repayment.

On Dec 31, 2015, 1MDB inked a share sale agreement to divest 60% in its Bandar Malaysia development project to a consortium comprising Johor-linked Iskandar Waterfront Holdings (IWH) and China Railway Engineering Co Corp (M) Sdn Bhd (CREC) for RM7.41 billion. The deal values the entire project at RM12.35 billion.

The sale is expected to conclude by end-June 2016 and 1MDB will receive a 10% deposit upon executing the agreement.

While both parties have not made a final decision on how the remainder will be paid – in cash or otherwise – if it is assumed that the entire amount will go towards reducing 1MDB’s borrowings then it is another RM7.41 billion taken away.

Will Putrajaya buy 40% in Bandar Malaysia?

However, progress towards resolving debt woes aside, questions remain on 1MDB’s future moves. Among others eyes will closely follow developments vis-a-vis 1MDB’s remaining 40% stake in the Bandar Malaysia development project.

A February 2015 statement on its debt rationalisation plans, apart from outlining an intention to monetise its assets, indicate that 1MDB will be wound down in favour of spinning off its core businesses into standalone entities. This raises the possibility that the 40% equity in Bandar Malaysia may be transferred to the MOF or another party.

Transferring the stake to the government is a possibility that has been considered, acknowledged 1MDB chief Arul to journalists on Dec 31, as part of the rationalisation plan. However, “no final decision has been made” on whether it is something the company intends to do, he added.

At the RM12.35 billion valuation for Bandar Malaysia development project, the 40% equity would be worth RM4.94 billion. A transfer to the MOF may entail a consideration possibly via cash payment or debt assumption, although these possibilities remain unclear.

In addition, the asset transfer of US$1 billion in value to IPIC, stipulated in the end-May white-knight deal with a deadline of June 30, 2016, also raises a question: where will the asset to be transferred come from?

One possibility is the Tun Razak Exchange (TRX) development project, the only core business of 1MDB that has not been part of a major divestment deal. Portions of the 486-acre site, however, had been sold to various parties.

Among others, earlier in 2015 there was a controversial RM188 million sale of a 1.56-acre plot to Tabung Haji as well as a reported RM1 billion sale to Retirement Fund Inc for a 40-storey building and land.

Questions remain on murky past

In turn, while 1MDB may be close to resolving its debt woes, accountability issues from its past murky dealings remain unsatisfactorily answered. At the heart of the matter, it remains unclear if anyone will be taken to task for questionable decision making that has dug a hole out of which 1MDB is trying to escape via its rationalisation plan.

Among others, these issues include why 1MDB chose to overpay grossly for its power assets between 2012 and 2013. To recap quickly, 1MDB paid a total of RM12 billion for its power assets and, by conservative estimates, overpaid by some RM3 billion.

This means that 1MDB is arguably selling its power assets at a loss to CGN, who is paying RM9.83 billion in cash. While CGN is taking over associated debt, 1MDB’s original purchase of these power assets also came with inherited debt. Read more here.

Also unexplained satisfactorily are 1MDB’s mispriced bonds between 2009 and 2013, which altogether has caused a loss of RM6 billion. Questions remain – among others, was there a deliberate intention to misprice these bonds in favour of mysterious investors, who took up the underpriced bonds for a quick profit from instantly reselling them at market prices?

The possibility is stark as a “yes” answer to that question implies a frightening, outrageous possibility: a deliberate intention to siphon off billions of ringgit. KINIBIZ examined the matter in more detail here.

Another issue yet to be satisfactorily addressed is some US$6.5 billion (roughly RM27 billion at current exchange rates) in bond borrowings arranged by Goldman Sachs. The use of these funds remain unclear to this day (more details here), nor is it clear to the public why 1MDB chose to pay outrageously generous fees to Goldman Sachs for its services (read more here).

Arguably the biggest controversy that remains unsatisfactorily addressed is 1MDB’s strange decision in 2009 to embark on a hasty joint venture with PetroSaudi International Ltd, which entails 1MDB injecting US$1 billion in cash for a 40% stake.

Six months later this deal was terminated and the 40% equity was strangely converted into a loan to what is a privately owned entity in PetroSaudi, contradicting 1MDB’s mandate to drive strategic development of the Malaysian economy.

Later revelations showed this endeavour was a tragedy as US$700 million of the original cash injection was diverted into a bank account controlled by businessman Jho Low and unrelated to the joint venture entity. Neither 1MDB nor Jho Low has explicitly denied this transfer happened. Read more here.

To read KINIBIZ year-end review of the entire matter, start here or get a copy of the KINIBIZ bumper issue from major newsstands nationwide.

It is by sheer coincidence that in 2013 an identical amount went into the prime minister’s bank accounts via several transfers, in what has since been called a political donation from the Middle East from unnamed donors. The Malaysian Anti-Corruption Commission and the new attorney-general has denied any link between this donation and 1MDB.

However, proper explanations for these issues still elude concerned Malaysians. While 1MDB may be able to resolve its debt conundrum and put out that particular fire, the scandal will not be fully resolved if direct answers are not forthcoming on who was responsible for starting the fires in the first place and whether this was due to incompetence or deliberate intent.

And, if the latter proves to be the case, whether anyone will be taken to task for what may be the gravest set of wrongdoings in recent national memory.