Monday, 21 May 2018

Time for 1MDB to come out in the open

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IFR Asia’s Jonathan Rogers suggests latest private placement serves neither transparency nor sensible pricing

IFR Chief Analyst Jonathan Rogers

Jonathan Rogers, IFR Asia Chief Analyst

SO OUR OLD friends from Malaysia’s 1MDB are back again, or should I say were back again, since the US$3bn 10-year private placement arranged for the government investment vehicle by Goldman Sachs was closed in conspicuous silence some weeks ago – on March 29 to be precise.

The under-the-radar modus operandi mirrored that seen on the US$1.75bn 10-year private placement Goldman closed for 1MDB in June. As with that deal, the new transaction is likely to spark controversy, not just because of the quiet manner in which it was completed but because it comes barely three weeks before Malaysia’s general election on May 5.

That is because Malaysia’s opposition party led by Anwar Ibrahim has called for 1MDB’s abolition as part of its election manifesto, claiming 1MDB, which replaced the former Terengannu sovereign wealth fund in and is a plank of prime minister Najib Razak’s New Economic Policy, duplicates the functions of the country’s pension fund Khazanah Nasional. But beyond that seemingly anodyne policy call, Anwar has claimed that the debt assumed by 1MDB could bankrupt Malaysia.

Meanwhile, various Malaysian commentators have criticised 1MDB for lacking transparency, and it seems likely that the latest transaction will simply add to the noise – if that’s the right word – which surrounds the entity.

THERE IS AN obvious point to be made about the 1MDB private placement, the size of which equates to last week’s US$3bn two-tranche transaction for the Republic of Indonesia, which was the largest G3 public offshore market deal so far this year. Why wasn’t the transaction launched, marketed and distributed like any conventional bond transaction rather than placed privately?

While there are, no doubt, many deals of hefty size in Asia that could have been placed with one or a handful of investors, issuers take the public route because it best serves their interests.

Not only does canvassing a broad base of investors enable syndicate bankers to discover the optimum price point at which a deal can be successfully placed, the secondary trading of a well-placed bond will tend in most cases to lower an issuer’s implied cost of term funding. It also opens up a broad investor base which can be called upon in the future to provide funds and secondary market liquidity.

And the bookbuilding process can often uncover hitherto unimagined demand for an issuer’s paper which in turn allows leads to drastically tighten pricing. Not so with a private placement, where demand is uncovered bilaterally or with a handful of investors.

Taking the public route also helps large enterprises build up liquid meaningful yield curves, again, something which the private placement market cannot provide. And when private placement paper finds its way into the secondary market, it inevitably does so through the brokers. It’s not uncommon to see paper crossed for obscenely large skims between a less than clued-up seller and an even less savvy buyer.

The last time around, 1MDB’s paper, which priced at Treasuries plus 425bp, was rumoured to have been shown a few days later to an Asian insurance company at around 200bp inside that level.

None of this does any service whatsoever 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.

We may yet see standalone public issuance from 1MDB in the future

AT LEAST THIS time around 1MDB did not seek a third-party guarantee for the private placement, unlike with June’s deal which was guaranteed by Abu Dhabi’s International Petroleum Investment Co.

That represents a bit of progress on the credit market sophistication front and, who knows, we may yet see standalone public issuance from 1MDB in the future.

In the unlikely event of an opposition victory next month we won’t, assuming the policy pledge to dismantle 1MDB would be honoured. But I’d be interested to see just where 1MDB would price in the public markets in relation to its private placements, all things being equal, and more specifically just how much of that issuance would be placed onshore to non government-linked entities.

In the meantime the opposition has thrown serious brickbats at 1MDB, with Anwar questioning the company’s deals with PetroSaudi and its relationship with Najib. He also called for a special audit of the company.

That background noise didn’t stop S&P from last Friday rating the new 1MDB private placement A–, on a par with Malaysia’s sovereign rating, and stating this was based on “the strength of documentation supporting the transaction and the country’s willingness to support the payment obligations of 1MDB under the notes”.

That’s all well and good, but 1MDB has yet to release to the public its annual accounts. Perhaps that would be a good idea and would soften the noise surrounding the company. One thing’s for sure: more private placements like the one on March 29 won’t silence its critics.

And another thing’s for sure: Goldman has done, and is doing, quite nicely, courtesy of its relationship with 1MDB. Erring on the side of caution when it comes to estimating its fee income from 1MDB, I shall assume fees of 1.5% were paid on the latest transaction and on last year’s. That makes a payday of more than US$71m for the US house off two deals. Better than sweating it out on an Indian or South Korean bank deal to pull in fees in the low six figures shared with a cast of thousands. Nice work, if you can get it.

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