Another mystery around 1MDB

IFR 2065 10 January 2015 to 16 January 2015
6 min read
Jonathan Rogers

IN MY LAST column of 2014 I drew attention to the dangers of a collapsing oil price for the Malaysian economy. Now that the price of oil has fallen below the psychologically significant US$50 per barrel, I have no more reason to be sanguine about Malaysia’s economic outlook than I was last December.

But I didn’t expect to be writing about Malaysia Inc so soon in the New Year, let alone about a favourite bête noire of this column: the Malaysian sovereign wealth/ private equity fund 1MDB.

A local financial newspaper reported last week that 1MDB had failed to repay a M$2bn (US$563m) loan to local banks on the November due date, had extended repayment to the end of December, and was seeking an extension for repayment to the end of this month.

That in itself is not really a big deal since – as IFR reported last October – the plan was always likely to be for that loan to be extended, or reduced via internal cash. But there’s the matter of a US$1bn loan syndicated to six banks, including lead Deutsche Bank last October, which was raised to refinance group debt and is due to be paid off inside 12 months via an initial public offering.

1MDB is once again in the spotlight, and the reporting of the loan extension can hardly be good news for its efforts to IPO the power unit.

It also came just as the company replaced its CEO Mohd Hazem Abd Rahman with Arul Kanda Kandasamy. That replacement might just be a natural succession but it means 1MDB has now had three chiefs in just over two years.

Add to that the fact that the company has also gone through three auditors in about the same time and the impression is not exactly comforting for holders of the company’s debt. 1MDB’s US$11bn-equivalent liabilities are becoming a negative input into Malaysia’s credit credentials, given that a large chunk of the debt carries the sovereign’s backing.

There could hardly be a worse time for 1MDB to attempt an IPO

NONE OF THIS will be ticking boxes for those who are being courted to invest in 1MDB’s planned IPO. This has been mooted for a long while, and had been on the cards for the first half of this year. One would at least expect the M$2bn loan to be redeemed to the satisfaction of creditors before the IPO marketing timeline can be inked.

There could hardly be a worse time for 1MDB to attempt an IPO. The Malaysian ringgit is at an all-time low against the Singapore dollar, a collapsing oil price is jeopardising the country’s public finances, and global equities are wobbling in the face of Federal Reserve policy normalisation and the possibility of another eurozone crisis.

A moot question then would be, if an IPO is too big an ask, just what happens to the US$1bn raised via the syndicated loan last year that was contingent upon the public offering of 1MDB stock? Will the banks play ball and leave it in place as it stands? Or might they put further pressure on 1MDB’s finances by hiking the existing margin of around Libor plus 300bp?

We will find out over the next few months in what promises to be an eventful quarter for 1MDB and something of a baptism by fire for Mr Kanda, a well-thought-of chap who used to head up investment banking at Abu Dhabi Commercial Bank.

1MDB lists one of his areas of expertise as debt restructuring. Is that a coincidence as far as his qualifications for the new job are concerned? Something tells me perhaps not, but again we must wait and see.

LAST YEAR WAS certainly a rotten one for Malaysia, with its unprecedented run of aviation disasters and extensive flooding in the states of Kelantan and Terengganu, with 65,000 people evacuated and a clean-up bill of around M$2bn.

The authorities will be hoping for a change of luck, although everything at the moment seems to be pointing in the opposite direction. Last week, UK lender Standard Chartered announced it was reducing its Malaysia headcount by 11% as part of a global cost-cutting drive. Not at a good time and not good symbolism for Malaysia.

To return to 1MDB, it might just be that it has simply failed to communicate with sufficient transparency to the market and to the Malaysian public. It claims its assets comfortably exceed its liabilities, although local critics point to an accounting revaluation of some of its power assets as a smoke-and-mirrors gambit that makes it appear solvent when it is not.

And there is the matter of private debt placements at off-market prices via Goldman Sachs, which I have written about in this column, and which contributed to an astronomical wallet for the US firm.

I wish Mr Kanda good luck, because his work is certainly cut out for him. But at this critical juncture for 1MDB he needs urgently to communicate a change of culture at the firm, based on transparency and fair market practice. And, with the company confronting a severe refinancing burden, he really needs to do that IPO.

Jonathan Rogers