A multi-billion dollar settlement from Goldman Sachs and a 12-year prison sentence for Malaysia’s former prime minister provide just the latest dramatic developments in 1MDB’s capital markets misadventures.
Some readers of this magazine may remember early descriptions of 1MDB’s bond market activities. IFR’s June 1 2012 edition carried the headline “Mystery over jumbo 1MDB deal”, and a piece questioning why a Malaysian sovereign fund had overpaid for a US$1.75bn bond by perhaps as much as 240bp (a cool US$420m of unnecessary interest over the 10-year term).
Murky private placements and loans dressed as bonds were at the time sadly all too common in the Asian debt capital markets, where banks still compete tooth and nail to be top of the underwriting league table. A US$1.75bn sole mandate took that to the next level, but could, perhaps, be explained by Goldman's role helping 1MDB purchase a portfolio of power assets at the time. The under-the-radar placement of another US$1.75bn bond issue in 2012, also arranged by Goldman, came with no such explanation.
When news of a US$3bn private placement leaked out in the run-up to the country’s general elections in May 2013 it was even clearer that something was seriously amiss. The deal was so mispriced that IFR’s Jonathan Rogers calculated Goldman could have made US$700m by simply flipping the bonds to buyers at a market rate. (He wasn’t far off: the US Department of Justice calculated Goldman pocketed about US$600m from its work on 1MDB’s bonds.)
The fact that 1MDB was willing to offer those kinds of discounts to access the capital markets should have set alarm bells ringing immediately.
Explanations at the time were unconvincing. 1MDB needed money quickly, conventional bookbuilds weren’t possible, and the bonds came with some complex structuring. Even if all that was true, a genuine sovereign fund should never have been allowed to be so frivolous with taxpayers’ money, and in hindsight it’s clear the only “structuring” involved was making the proceeds disappear. Those explanations have not got any more convincing even if Goldman was still advancing them long after the scandal broke.
Goldman's role in this debacle has now cost it at least US$2.5bn, perhaps with more to come. That settlement must now serve as a warning to others who may be tempted to bag nine-figure sums on what should be run-of-the-mill bond issues. Risk committees must ask why any client would be willing to pay so much for their services. If it looks too good to be true, it almost certainly is.
That lesson applies for the capital markets more broadly. The arrangers and other intermediaries that bring a deal to market have a duty to act with integrity, promote transparency and ensure fair pricing. They must act as gatekeepers, not look the other way when something doesn't add up.
As for Goldman, there are still calls for the bank to face criminal charges in the US for its involvement in the scandal. As executives – and shareholders – count the immense cost of their Malaysian misadventure, there may be more painful lessons yet to come.
Listing in la-la land
Nine IPOs were completed in the US in the last week of July to raise proceeds of US$5bn. Four were SPACs, but there was also the largest China-to-US float in more than two years (a US$1.1bn trade from Li Auto) and the first Brazilian company to list in the US since the coronavirus hit (“edutech” company Vasta Platform).
Away from the companies tapping into excitement around the cloud, medicine and electric vehicles was Vital Farms, an organic egg supplier. It was the sleeper success of the week with an upsized deal that priced above guidance that had already been revised up. The shares promptly traded up 63.5% on their debut.
And then came former Citigroup banker Michael Klein, who raised US$1.8bn in the most aggressively structured SPAC yet in the US – and his fourth to-date.
Far from slowing down for the summer, the next few weeks look similarly intense.
Rocket Companies is bookbuilding for what is likely to be the world’s largest non-SPAC IPO this year, with proceeds of up to US$3.3bn comfortably exceeding the US$2.9bn Amsterdam float of JDE Peet’s and the US$2.5bn raised by Royalty Pharma in the US.
Li Auto is also set to be overshadowed within weeks as Chinese property listing service KE Holdings has started pre-marketing a US$1bn–$2bn NYSE listing.
And nine companies are again scheduled to price IPOs in the coming week, putting the US market well ahead of the rest of the world.
Given everything that is going on in the US and the rest of the world at the moment, some might think that all this is the clearest sign yet of utterly mad markets. And yet with US IPO returns over 40% so far this year investors are benefiting from a market awash with central bank-induced liquidity.
At some point the market will turn, but as it stands the biggest losers look set to be European and Asian exchanges trying to argue that anywhere other than the US is the best place to list.