Why is 1MDB selling TRX land?

By Khairul Khalid

The Tabung Haji–1MDB land fiasco poses the question – why is 1MDB selling land at its crown jewel TRX, and possibly disposing its power assets too? Could it be that it now has no other way of raising cash to service payments for its RM42 billion debts?

______________________________________________________________________

The contentious RM188 million Tabung Haji–1MDB land deal raises many questions – not least over issues of transparency, inflated prices, conflicts of interest and allegations of a bailout for 1MDB.

Another significant question – why is 1MDB disposing land at one of its prized assets – the centerpiece Tun Razak Exchange (TRX) project – in such a hasty and surreptitious way?

Many point out to the obvious fact that 1MDB is simply running out of options in raising cash to service its debts of approximately RM42 billion.

Deutsche Bank’s RM3.6 bil bombshell

Yesterday, Singapore’s Business Times reported the bombshell that a consortium of six international banks, led by the Deutsche Bank, are seeking early payment of their US$975 million (RM3.6 billion) loan to 1MDB.

The loan is supposedly only due in four months (September 2015), but according to the Business Times report these banks are calling in their loan earlier because they are increasingly jittery about the whole 1MDB saga.

This led Arul Kanda, chief executive office (CEO) of 1MDB to respond that “We are aware of recent press reports and statements concerning a loan taken by 1MDB in September 2014. Whilst we would like to respond in detail, this relates to a confidential banking matter, which prevents us from commenting at the present time.”

“However, we intend to update the market as soon as we are in a position to do so,” added Arul.

The Tabung Haji–1MDB fiasco blew up last week when a little known blog called ‘The Benchmark’ leaked the sale and purchase documents of a proposal for the RM772 million purchase of two parcels of TRX land.

After a series of denials and U-turns by the Pilgrim Fund (Tabung Haji), it finally admitted that it had purchased a parcel of TRX land from 1MDB but at a smaller scale of RM188 million. The other parcel of land, valued by Tabung Haji to be worth around RM578 million, was sold to Indonesian developer Mulia Group for RM665 million, according to an announcement yesterday.

Although they defended the deal as a purely commercial move, it was quickly lambasted by the public. After intense political pressure, Tabung Haji announced that it was selling off the TRX land, at the prime minister’s advice.

Left pocket, right pocket

Since the inception of TRX in 2009, the 70-acre development with an estimated  gross development value (GDV) of RM40 billion in the heart of Kuala Lumpur has been heavily touted by 1MDB as the next leading centre for international finance and business.

So why the rush now to suddenly sell TRX land to government linked entities such as Tabung Haji and Retirement Fund Inc (KWAP)?

Although 1MDB profits from the Tabung Haji land transaction, that is mainly due to its extremely low land acquisition costs. It bought the TRX land from the government in 2011 for RM64 per square foot (psf) and sold it four years later to Tabung Haji for RM2,773 psf.

The grossly inflated price, the lack of information as well as the left pocket-right pocket nature of the deal involving government controlled entities only serve to reinforce the perception that the main objective is to help cash-strapped 1MDB.

Will 1MDB exit Project 3B?

However, it is not just the Tabung Haji land fiasco that has underlined 1MDB’s desperation for cash. It has been apparent in other moves involving 1MDB in the last few months.

For example, another announcement this week also reveals that Tenaga Nasional Bhd (TNB) is in talks to acquire 1MDB’s 70% stake in the RM11 billion 2,000MW coal-fired power plant known as Project 3B in Jimah, Negeri Sembilan.

1MDB officially clinched the project in February last year, in consortium with Mitsui Co Ltd, for a 25–year concession. It had edged out close competition from another bidder YTL Power International which was initially reported to be the frontrunner for the project with a proposal of a lower adjusted tariff. Project 3B is scheduled for commissioning in stages beginning from October 1, 2018.

According to Energy, Green Technology and Water Minister Maximus Ongkili, due diligence on TNB’s possible purchase of 1MDB’s stake has just been completed, although no final decision has been made on it just yet.

KWAP’s RM4 bil loan to 1MDB

Pension fund KWAP is also said to be purchasing TRX land to build its new headquarters, although KWAP has clarified that it has not made an investment decision on it yet.

KWAP has a history with 1MDB. In 2011, KWAP provided a RM4 billion loan to SRC International, which was then a subsidiary company of 1MDB.

SRC has since been wholly absorbed by the MOF and the loans, guaranteed by the federal government, have been wiped off 1MDB’s accounts.

RM950 mil “standby credit”

Last March, the government provided a RM950 million loan to 1MDB.  According to Arul, the RM950 million was a “standby credit” facility by MOF, as 1MDB’s 100% shareholder, “to help ensure that it (1MDB) is able to realise the maximum value of its plans”.

Rafizi Ramli, MP (MP) of Pandan, called the RM950 million “standby credit” a “bailout” of 1MDB, despite reassurances by the government.

Previously, deputy Prime Minister Muhyiddin Yassin had declared that there would be no government bailout of 1MDB.

Ananda’s RM2 bil rescue

Last February, there were mounting concerns that 1MDB was about to default on a RM2 billion loan that was extended several times. Rumours had it that the banks were preparing to declare the debt a non–performing loan (NPL).

Just days before the deadline, 1MDB’s CEO Arul Kanda declared that the company had settled the RM2 billion loan owed to several banks, including Maybank and RHB Capital.

After feverish speculation, the government finally admitted a month later that tycoon Ananda Krishnan’s company Tanjong Public Ltd had helped secure RM2 billion in “refinancing” for 1MDB.

According to the Second Finance Minister Ahmad Husni Hanadzlah,  Tanjong had helped “manage” the refinancing for 1MDB which was related to 1MDB’s RM8.5 billion purchase of Ananda’s Powertek Energy.

The minister explained that the loan is to be repaid over 15 months for the principal amount and the interest over six months. The government, however, has not revealed whether there were any pre–conditions or concessions attached to Ananda’s loan.

All of the above show 1MDB’s dire predicament that is currently nowhere close to a resolution. With the initial public offering (IPO) of its power assets delayed indefinitely, 1MDB will find it hard to meet its financial obligations, thus necessitating land deals such as the one it made with Tabung Haji.

The big question now is – will these land deals (or disposal of power assets) be enough to get 1MDB out its financial troubles?

All told, 1MDB has very few physical assets to show for its massive debts. The signs are not good and if news of the Deutsche Bank consortium calling in its RM3.6 billion loan are any indication, the financial institutions and business community are getting more and more nervous about 1MDB’s uncertain future.

Yesterday: Tabung Haji-1MDB land fiasco: Investment or bailout?