By Stephanie Jacob
1Malaysia Development Bhd or 1MDB’s investments in Cayman Islands of over RM7 billion are actually earning less than the cost of debt, according to media a statement by Tony Pua, Member of Parliament for Petaling Jaya Utara and DAP national publicity secretary.
Tony Pua
He said the bulk of 1MDB’s borrowings for this were raised in 2009 via an Islamic loan facility “sukuk” where 1MDB had to pay 5.75% interest. This meant that 1MDB was borrowing money at 5.75% to invest in an anonymous Cayman Islands fund which gave a return of 5.76%.
Worse, Pua added, 1MDB had offered the above sukuk at a massive 12% discount – meaning it only received RM87.92 in loan funds, for every RM100 it borrowed. But 1MDB has to pay 5.75% interest on the full RM100. Hence the effective interest rate payable by 1MDB for the sukuk is 6.71%. This meant that 1MDB is borrowing money at an effective interest of 6.71% to invest in an anonymous Cayman Islands fund which gave a return of 5.76%.
“What a fantastic investment strategy!” he said sarcastically.
Pua said the reason why the US$2.32 billion (RM7.6 billion) was invested in Cayman Islands in the first place was because 1MDB terminated and redeemed its 11-year loan to Petrosaudi International Limited in 2012, when the multi-part loans were to mostly mature in the year 2021. The loan to Petrosaudi in the form of “Murabaha notes” commanded a guaranteed fixed interest (profit rate) of 8.67% per annum.
“Hence it must be asked, why did 1MDB redeem its loan earning a guaranteed fixed return of 8.67% and invest in a fund manager in Cayman Islands which it refuses to name, giving a return of only 5.76%? Does that make any financial sense?
“The rational thing for 1MDB to do, which it must do, to avoid further embarrassing losses for the rakyat, is for the company to withdraw the funds from this Cayman Island fund-or-fund-manager-which-cannot-not-be-named, and pay-off its sukuk debt, guaranteed by the Federal Government, costing 6.71% per annum,” Pua said.
Saying 1MDB’s change of auditors from KPMG to Deloitte Malaysia is no ordinary change he took issue with 1MDB’s statement that “this is nothing special or new as it is in line with best market practice where companies decide on its current or future auditors after considering all aspects, including but not limited to conflict of interests and other consideration”.
Pua said, ”1MDB could not be more wrong, or we could perhaps forgive its management of attempting to make light of a very bad situation. There is no “best practice” in this world which says that it is perfectly normal to suddenly change auditors long after the accounts were overdue. Had the change been made well before the end of 1MDB financial year Mar 2013, there would have been little for us to question the company.
“However, when the accounts are significantly delayed by nearly a year, and the auditor quits before it gets finalised, then surely every rakyat has the right to ask for an honest explanation. For example, why couldn’t the change of auditors be done only for the Mar 2014 accounts?”
Pua said that it was ironic that the managing partner of Deloitte, Tan Theng Hooi himself cited (The Star 2/8/2012) that the “failure to release financials on time is not acceptable and may indicate there could be unresolved accounting, management or other issues in hand”, when criticising public listed companies for late publication of financial statements.
Pua pointed out that in Malaysia, as well as in countries like the United States, public listed companies are given only six to eight weeks to report their quarterly accounts.
“While 1MDB isn’t a listed company, it is a sovereign wealth fund which is of even greater public importance, and it is only required to file its reports once a year! And yet, despite the appointment of KPMG, a top international accounting firm, it is overdue on its financial report by nearly a year.
“1MDB gave the excuse that “its new business direction has helped it grown exponentially, requiring consolidation of new subsidiaries into the group” and hence the delay in its accounts.
“The excuse does not hold water because its acquisitions were not any more complicated than many carried out by some of our largest companies on the stock exchange – such as the Sime Darby acquisition of Guthrie and Golden Hope Plantations. And yet, these companies were able to finalise their accounts in a time manner in accordance to the stringent rules set by Bursa Malaysia,” he said.
Pua’s latest comments came after 1MDB released its own statement on Friday to answer some of the questions that the MP had raised on Thursday.
In the statement, the sovereign fund emphasised that to come up with a fair valuation of the company it was necessary to have detailed information about operations, without which any conclusion would be inaccurate.
In addressing its failure to submit its audited accounts on time, it said that the it had taken a new business direction, and needed time to consolidate its new subsidiaries into the group, adding that this was the reason that an extension had been requested for and granted by the CCM.
The extension is until March 31, 2014, and 1MDB’s says it expects to file and submit its audited accounts to CCM by the extension date.
Regarding its parting with KPMG, it said the decision was a mutual agreement and that it was “in line with best market practice where companies decide on its current or future auditors after considering all aspects, including but not limited to conflict of interests and other considerations.”
The government backed entity also defended its Caymen-based fund, emphasising that it was regulated and licensed.
It said that its fund managers “adopt an absolute return strategy of which the primary investment objective is to achieve long term capital appreciation and/or steady income through investments in listed and/or unlisted companies,” and that the funds have an investment objective specifically tailored and aligned to 1MDB.
The statement said that to date, US$200 million has been remitted from the fund to 1MDB to service repayments, out of which US$134 million came from the 5.76% cash dividend generated within the first year of the investment period.
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