By P. Gunasegaram
In the third part of its series on 1Malaysia Development Bhd, KiniBiz examines its annual accounts and comes up with some conclusions. For the first two years of its existence, it has merely financed its former partner in a joint venture since abandoned, Petrosaudi International Ltd – to the tune of nearly RM6 billion. The question is why.
DAP MP Tony Pua says 1Malaysia Development Bhd is a giant ponzi scheme whereas 1MDB itself describes itself as a strategic development company.
“As a strategic enabler for new ideas and new sources of growth, 1MDB leads in market-driven initiatives to help transform Malaysia into a thriving economy,” its website says.
Pretty lofty words but the problem is that 1MDB has not been very articulate about how it wants to achieve its aims. Since setting up in 2009, it has not publicly reported its results.
Its accounts since setting up in late Feburary 2009 to the year ended Mar 31, 2011, show a different picture to what the website paints and indicates that the profits made to date are largely paper gains which have no impact on cash flow, raising serious questions over utilisation of large funds raised.
If not for some paper transactions and revaluations, 1MDB would not have reported any profits, which no doubt led to Pua’s assertion that it was a Ponzi scheme.
In May 2009, 1MDB issued bonds of RM5 billion via an Islamic facility at such favourable rates to those who took them up that it raised many questions among those in the finance industry at the time. (KiniBiz deals with the various bond issues in an article tomorrow.)
Because these bonds were issued at a discount to the par or nominal value, 1MDB actually raised RM4.40 billion and not RM5 billion. The first investment that it made was in Sept 2009 when it put in US$1 billion for a 40% stake in a US$2.5 billion joint-venture with Petrosaudi International Ltd.
This venture, according to the joint press release, will “seek, explore, and participate in business and economic opportunities which result in the enhancement and promotion of the future prosperity and long-term sustainable economic development of Malaysia. It is expected to actively make investments in the renewable energy sector.”
The JV was supposed to bring investments into Malaysia from the cash-rich Middle East but the initial investments did not at all pan out in that way.
While 1MDB put in US$1 billion (about RM3.49 billion then) into the JV, Petrosaudi injected an asset for US$1.5 billion, Pua points out, which was an oil reserve in the Caspian Sea. That was not renewable energy and that certainly did not mean investments into Malaysia.
If anything, it looked like 1MDB was bankrolling Petrosaudi’s attempts to develop the Caspian sea oil reserve. But according to its accounts, on 31 Mar 2010 (incidentally, the last day of its accounts for the financial year), 1MDB sold the 40% stake in the JV, 1MDB PetroSaudi Limited which was incorporated in the British Virgin Islands, back to PetroSaudi.
The sale was made for US$1.2 billion (RM$4.14 billion), giving 1MDB a handsome gain of RM200 million (or about RM650 million at exchange rates then). But there was a catch – IMDB issued debt of a like amount for the sale -it received no cash.
That’s not all, while the notes carry a so-called profit rate ( equivalent to interest rate) of a good 8.67%, it will be repaid in one lump sum only 11 years later on Mar 31, 2021. The loan was guaranteed by Petrosaudi itself.
The questions that arise: Why did it exit the JV? How did it make a gain of RM650 million on the investment in just six months? Why did 1MDB not insist on cash payment and instead accept an 11-year bullet repayment bond?
Effectively, almost all of the RM4.4 billion barring some RM260 million that 1MDB raised was used to finance Petrosaudi! That’s hardly a strategic investment even though the two percentage point difference between what 1MDB receives from the loan and what it has to pay its own bondholders brings in recurrent income.
While auditors KPMG did not qualify the accounts for the period from incorporation of 1MDB (Feb 27 2009) to Mar 31, 2010, they emphasised that the fair value of the loan to Petrosaudi depended on “certain assumptions” which are “critical”. The accounts did not show the assumptions but said that the fair value of the debt ranged from RM3.86 billion to RM5.04 billion.
For the period to Mar 31, 2010, 1MDB reported a pre-tax profit of RM425 million but if not for the “gain” of RM650 million on the disposal of the 40% stake in the joint venture with PetroSaudi it would have made a loss of RM225 million.
For the year to Mar 2011, 1MDB said it made a profit of RM544 million but even that is because of a revaluation of a piece of land that it acquired from the government at RM194 million and subsequently revalued to RM1.02 billion for a gain of RM827 million. If not for that 1MDB would have reported a loss of RM283 million.
But perhaps even more worrisome is that 1MDB increased its loans to Petrosaudi by a further RM1.57 billion through a US$500 million facility carrying an interest rate of 8.25% a year. This will be repaid in a bullet payment in Mar 2015. Incredibly, 1MDB’s exposure to Petrosaudi has increased to RM5.71 billion from RM4.14 billion.
And since 1MDB raised no further bonds during this period, the increased lending to Petrosaudi came from term loans and other borrowings.
It becomes obvious why Pua calls it a ponzi scheme – Petrosaudi is paying interest to 1MDB for the loan it took from 1MDB to buy 1MDB’s 40 per cent stake in the JV 1MDB Petrosaudi.
Again, why is 1MDB raising funds for Petrosaudi? And can we be sure that Petrosaudi will pay back the sums in bullets, one maturing in five years and one in 11 years? Recall that 1MDB has no recourse to anything else but a guarantee from Petrosaudi for this. Everything so far has revolved around Petrosaudi.
Perhaps one saving grace could be that there is at least a spread that 1MDB is getting from using the proceeds of its borrowings and on lending to Petrosaudi to give a profit from holding financial securities.
Alas, even that has not worked out right. Its income from holding financial instruments amounted to RM343 million for the year but costs were RM333 million, giving a net gain of a mere RM10 million. But this was wiped out many times over by derivative losses of over RM250 million to give a net loss for holding financial instruments of RM242 million.
For roughly the first two years of its operations, 1MDB has made profits only because of a gain on a transaction and a revaluation. Otherwise it would have been in the red.
And it has had no achievements to speak off in this period. It has merely put funds it raised through a favourably priced RM5 billion bond issue and more into Petrosaudi. Why?
Detailed accounts for the year ended Mar 2012 are not available but are likely to prove interesting.
Tomorrow: The story behind the burgeoning bonds
Yesterday: 1MDB’s colourful family and friends
You must be logged in to post a comment.