By P. Gunasegaram
1Malaysia Development Bhd’s latest available annual report indicates a worrying trend. It shows an unravelling of a dubious loan to little-known PetroSaudi International only to invest the effectively redeemed amount of some RM7 billion in a portfolio with an unspecified Cayman Islands registered company. What is Malaysia’s strategic development company investing in such a cloak and dagger manner in such a faraway place and what benefit does it give Malaysia? KiniBiz takes a look at the issue in our second article in our second series on 1MDB.
1Malaysia Development Bhd’s latest available annual report, for the year ended Mar 31, 2012 shows that loans to PetroSaudi International Ltd, its partner in the Middlle East, had actually increased further from the RM5.71 billion outstanding at the end of the previous financial year.
KiniBiz had outlined how the debts were made in a previous article titled “1MDB loans to PetroSaudi put nearly RM6 billion at risk.”
According to the annual report, 1MDB increased its loans through a murabaha Islamic facility by just over RM1 billion, bringing the amount of the facility to RM6.8 billion. This was then placed as an asset earmarked for sale in the balance sheet as at Mar 31, 2012 before being sold subsequently.
The loans to PetroSaudi itself arose out of dubious circumstances (see charts). First, in Sept 2009, 1MDB invested US$1 billion for a 40% stake in a joint venture with PetroSaudi. PetroSaudi injected no cash, putting in a Caspian Sea oil reserve at US$1.5 billion as its share.
But for some reason that was never explained, on Mar 31, 2010 (the last day of its financial year) it “sold” its stake in the joint venture back to PetroSaudi for US$1.2 billion, making a profit of US$200 million. But it did not get cash for it. Instead, PetroSaudi issued an 11-year bullet repayment Islamic murabaha carrying an interest rate of 8.67% to 1MDB.
Not just that, barely a year later at its next financial year-end, on Mar 31, 2011, it had extended a further US$500 million via a 5-year bullet repayment loan to PetroSaudi. And then exactly a year later, it extended yet another loan of US$330 million to PetroSaudi, making in all a grand total of RM6.8 billion equivalent, using various exchange rates prevailing.
According to notes on “subsequent events” in the annual report for the year ended Mar 2012, PetroSaudi, on June 1, 2012, redeemed the outstanding notes of RM6.8 billion, including profits. Yes, you might have guessed it, it received no cash – it was via yet another asset swap.
For the RM6.8 billion, 1MDB this time accepted a 49% stake in PetroSaudi Oil Services Ltd and a put and call option to buy the remaining portion at an option price of US$10, with options being exercisable any time up to its maturity on Dec 31, 2015. It did not say what kind of a company this was.
That means 1MDB injected money for an asset, sold it to PetroSaudi for debt notes, bought more notes from PetroSaudi, very suspiciously each time at balance sheet date when interest payment would be due, and then accepted assets again for settlement of the loan.
Finally, on 12 Sept 2012 less than three months later, 1MDB sells the 49% stake in its latest acquisition to “an external party” for a “consideration” of US$2.318 billion, which works out to just under RM7 billion at current exchange rates. It sold off more than 70% of its assets but it did not say who the external party was that it sold it to.
And if one thought finally, we can heave a sigh of relief that the money is finally coming back to Malaysia, no, that was not to be. “The total consideration arising from the disposal were reinvested in various classes of participating shares in a Segregated Portfolio Company, registered in Cayman Island,” the notes in the annual accounts said.
Considering the convoluted paper trail that has become characteristic of 1MDB’s deals, it is not even certain that the cash was received and then reinvested or there was merely a transfer of assets yet again for the sale consideration as was done two times previous to this.
And what is a segregated portfolio company (SPC)? And why is 1MDB investing in various classes of assets here when it is supposed to be a strategic development company which was set up to bring strategic investments into Malaysia which are vital for this country’s growth and development? Certainly 1MDB was never intended to be a portfolio investment company.
According to information on the net, the SPC was first introduced in the Cayman Islands in May 1998 by an amendment to the Companies Law. The concept of an SPC is that while it remains a single legal entity, it may create segregated portfolios such that the assets and liabilities of each portfolio are legally separate from the assets and liabilities of any other portfolios.
Basically that means that if 1MDB invests in a class of assets in the segregated portfolio and something goes wrong in this class of assets for whatever reason, it does not have a claim on the other assets that the SPC has. Seems rather risky.
Why would 1MDB need to invest in such assets and what benefit accrues to Malaysia by putting its valuable funds to such risks? Why can’t it at least list down in detail the assets that it has invested. That it has failed to do so raises legitimate suspicions over what it is doing and questions over whether the billions of ringgit raised are actually being wisely used.
In the first three years of its existence, according to its annual reports, 1MDB to its huge discredit has merely on lent money to PetroSaudi, money it obtained from a RM5 billion loan (net proceeds were RM4.4 billion because the bonds were issued at a discount) and other term facilities.
At the end of Mar 2011, 85 sen of every ringgit of the RM6.7 billion it borrowed went to PetroSaudi. One year later, the accounts showed that 87 sen of every ringgit of the RM7.8 billion borrowed went to PetroSaudi. 1MDB, our strategic investor, was for the first three years of its life, a mere money lender giving funds at very favourable terms to little-known partners.
Mohd Hazem Abd Rahman
In a recent statement over the raising of its US$3 billion loan, 1MDB’s new CEO Mohd Hazem Abd Rahman said: “1MDB is transparent and open about the placement of its funds. This was reported in the company’s annual return lodged with the Companies Commission of Malaysia.”
Really? Where and what investments were the funds invested in? We looked hard but there was no information anywhere in the annual report beyond what was reported above. And we have got no replies to our queries from 1MDB.
According to the 1MDB statement in verbatim: “As of FY (financial year) 13, all PSI (PetroSaudi International) Murabaha notes have been fully redeemed at a profit. The proceeds are reinvested in various classes of participating shares in a Segregated Portfolio Company, registered in the Cayman Islands. Cayman Islands is in the OECD white list of countries recognised by the Organisation for Economic Cooperation and Development for using international tax standards.”
That does not mean that 1MDB must not list its investments in Cayman Islands, explain why it made them, disclose the external party who bought the PetroSaudi Oil Services stake, explain its earlier debt to PetroSaudi and give assurances to the Malaysian public in concrete terms that all is well.
Without a doubt, there is no OECD country whose government-owned strategic development company is as opaque, unaccountable, questionable, dubious and silent as 1MDB.
1MDB has already mispriced borrowings which could have cost the nation as much as RM4 billion in losses paid for in higher interest payments over up to 30 years. Besides it has put at risk some RM7 billion in addition to that.
Tomorrow: 1MDB’s latest accounts and what it shows
Yesterday: Highly questionable US$3 billion loan
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