By P. Gunasegaram
Sketchy details have emerged over a US$3 billion debt which 1Malaysia Development Bhd has secured while its latest annual report for the year to Mar 12, 2012, reveals continuing serious concerns about the way some RM7 billion funds have been spent. Meantime US firm Goldman Sachs has emerged as a major player in 1MDB’s bond issues and some issues by the Sarawak government earlier. In the first of our second series of articles on 1MDB, KiniBiz takes a look at the US$3 billion loan deal just concluded.
The one big hallmark – if you could call it that – of 1Malaysia Development Bhd’s activities, especially its loans, have been secrecy and mispricing to the tune of billions. KiniBiz has highlighted the mispricing in one of a series of articles on 1MDB last month.
Since then the US$3 billion, 10-year bond has crystallised and made just days after the dissolution of Parliament earlier this month. Sources say that it was done with much secrecy with those showed the documents being asked to sign nondisclosure agreements.
According to IFR Asia, the coupon on the bonds was set at 4.4% of face value and people away from the deal named Goldman Sachs as the sole lead manager on the deal. Goldman itself refused to comment to the review.
The notes were rated A- by Standard and Poor’s, the same rating as for Malaysian government sovereign bonds, reflecting effective guarantees given by the Malaysian government for the bonds.
1MDB itself said in a statement that it raised the capital for its new strategic economic initiatives between Malaysia and Abu Dhabi.
“The proceeds from the US$3 billion capital raised is being utilised for investments in strategic and important high-impact projects like energy and strategic real estate which are vital to the long-term economic growth of both countries,” 1MDB said.
However, if 1MDB had brought back some RM7 billion in loans made first to PetroSaudi International and then redeemed and reinvested in unspecified assets in the Cayman Islands, it may not have needed to take the latest loan. KiniBiz deals with that in tomorrow’s article.
For now, it is widely believed in the industry that the RM3 billion bonds is likely to be similarly underpriced to earlier bonds, enabling windfall gains of up to RM1.9 billion to be obtained by the undisclosed investors who got first bite at this offering.
Calculations show that for a 10-year bond a two percentage point or 200 basis points underpricing of a bond when it is first issued, that is when it is sold at a yield of 200 basis points above what the market would bear, the gain to the original investors is about 20% of the face value of the bonds, in this case RM1.9 billion on RM9.3 billion of bond face value.
According to an IFR Asia report dated April 13, part of 1MDB’s earlier US$1.75 billion 10-year papers, which were issued at Treasuries (interest rate on US 10-year Treasury bills) plus 425 basis points was shown later to an Asian insurance company at around 200 basis points inside that level.
“None of this does any service whatever to the issuer, unless of course the primary aim was simply to get the funds in, whether the source is one investor, or in the case of the latest placement from 1MDB, a handful of investors,” IFR Asia’s senior credit analyst Jonathan Rogers wrote.
Touching on the latest debt issue, Rogers wrote: “Why wasn’t the transaction launched, marketed and distributed like any conventional bond transaction rather than placed privately?”
Why indeed, especially when this bond is virtually guaranteed by the government and enjoys a rating similar to Malaysian sovereign debt. With that kind of rating, it could have a much lower yield for investors than the six per cent speculated.
In fact at a mouthwatering six per cent, many of our local institutions, including the Employees Provident Fund would have loved to have got their hands on it, especially since it was government guaranteed. There would have been no need to go overseas and it could have been funded completely in ringgit given the ample liquidity in the local market.
Such a large bond, done with such secrecy and with such bad terms surely must raise many questions but the fact that 1MDB continues with this even after KiniBiz has written a series of articles shows that it continues to act with complete disregard to established norms in terms of the way it raises its funds and operates its business.
Despite all its talk about being transparent, 1MDB clearly is not and the dubious and questionable way in raising its funds and causing misappropriation of billions of public money is completely alarming. It’s bizarre that 1MDB is allowed to continue to operate in this manner.
Already, just in terms of the financing procedure itself, it could have lost the country as much as RM4 billion, and given a gain of a like amount to certain “investors”, in what amounts to nothing else than direct robbery of this country’s resources.
On top of that, it is also clear that funds raised earlier through bonds and more through term loans have been onlent to dubious investors overseas. While 1MDB claims that the investments have been redeemed for US$2.318 billion (about RM7 billion), the sum remains overseas in improperly explained investments.
Tomorrow: 1MDB’s mysterious investments.
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