1MDB settlement a high price for Malaysia

IFR Asia 989 - April 29, 2017
5 min read

The 1MDB saga reached a predictable and sickening milestone last Monday when the Malaysian investment fund said it had reached an out-of-court settlement with the Middle Eastern guarantor of two US dollar bonds totalling US$3.5bn.

1MDB’s agreement with Abu Dhabi’s International Petroleum Investment Company was predictable, inasmuch as the Malaysian taxpayer will ultimately be on the hook for the fund’s debts, and sickening inasmuch as it left billions of dollars still unaccounted for.

1MDB maintains that it paid US$3.5bn to an IPIC unit, Aabar Investments PJS Limited, in return for IPIC acting as guarantor on the US dollar bonds. IPIC claims that money went to an unconnected company registered in the British Virgin Islands with an uncannily similar name.

IPIC denied last week that Aabar (BVI) was its subsidiary. But Malaysia’s second finance minister Johari Abdul Ghani last week in somewhat desperate fashion, proffered a letter from the Registrar of Corporate Affairs of the British Virgin Islands confirming that it is (or was).

Can the world of international high finance be reduced to something as utterly farcical and absurd? And when it comes to playing the “Whose Baby?” game, I think I would trust the parent to know, rather than a third-party “verifier” from a faraway land of which the main players in this farce probably know very little.

Former Malaysian prime minister Mahathir Mohamad wasted little time in going public last Thursday with questions about where the money paid to Aabar (BVI) ended up.

I recall speaking to two of Asia’s leading bond syndicate heads about one of the placements on the day the trade was made public in 2012, and they suggested that the paper was largely placed on the strength of the IPIC guarantee – alongside the formidable reputation of Goldman Sachs, the sole underwriter.

That guarantee is now null and void, after 1MDB agreed to assume responsibility for all future coupon and principal payments on the 2022 bonds (over US$4.5bn, including interest), and pay another US$1.2bn to IPIC by the end of this year.

MINDFUL OF THE rather bad look of the settlement with IPIC (taxpayers on the hook and all that), 1MDB has said that those monies will be settled mainly through the liquidation of “investment fund units”.

These fabulously vague units have done the rounds ever since the 1MDB scandal erupted with full force around 18 months ago. There was once said to be US$2.3bn of investment units in the Cayman Islands in the name of 1MDB vehicle Brazen Sky, before some US$1.3bn was redeemed and used to pay debts, according to 1MDB. The remainder, still in units, was then placed with private bank BSI in Singapore, an institution which lost its licence last year after breaches of anti-money laundering regulations.

The nebulous nature of these units troubled former 1MDB auditor KPMG sufficiently that it refused to sign off on the company’s 2013 accounts unless 1MDB provided evidence of the units’ valuation, and was promptly sacked for its probity.

Meanwhile former Malaysian Deputy Prime Minister Muhyiddin Yassin last week questioned precisely how 1MDB would be able to monetise the units: for how much and to which buyer?

Perhaps 1MDB will be able to sell them to China General Nuclear Power Corp, which purchased 1MDB’s Edra Energy assets last March, in a move which helped pay the Malaysian fund’s short-term creditors and erase its bank debt.

NATURALLY, 1MDB PORTRAYED the out-of-court settlement last week in suitably upbeat fashion: “This arbitration settlement and monetisation of investment fund units represents the resolution of a significant challenge, and is a major part of the 1MDB rationalisation plan, which is now at its final stages of conclusion.”

Good for them. But it’s not good for the Malaysian taxpayer. Now that leading local political figures such as Mahathir and Muhyiddin are focusing on the IPIC payment, where the original funds went and how 1MDB will honour its near-US$6bn settlement with IPIC and its other outstanding debts, perhaps momentum will gather to have the questions surrounding 1MDB settled once and for all.

Prime Minister Najib Razak, who controls 1MDB in his capacity as the country’s finance minister, has held on to power through an extraordinary array of 1MDB-related events, including the closure of banks and imprisonment of bankers in Singapore, ongoing investigations in Europe and a major civil action from the US Department of Justice. Might this IPIC resolution threaten his position? I’m not holding my breath on that one.

Interested parties – including Malaysian taxpayers – can perhaps look to the DoJ and the new US Attorney General Jeff Sessions for a final answer of sorts. One wonders if the fact that Donald Trump once played golf with Najib and referred to him after the game as “my favourite prime minister” will have any bearing on the proceedings.

Jonathan Rogers_ifraweb