Desperate times at 1MDB

By P Gunasegaram
Malaysiakini
Apr 3, 2015

QUESTION TIME Recent developments at 1Malaysia Development Berhad (1MDB) have raised fresh concerns over the self-styled national strategic development company, on top of the numerous longstanding concerns it already has.

The changes in decision, flip-flops, contradictory statements and so on indicate an atmosphere of increasing desperation, the overriding reason for the anxiety being money, or more precisely the lack of it.

That is a rather dangerous situation for 1MDB to be in. At last count, end-March 2014, using figures from its annual report, it had borrowings, including some payables, of a massive RM46 billion, liabilities of RM48 billion and assets of RM51 billion.

With RM46 billion in borrowings and only RM13 billion in solid assets in power generation, why is 1MDB so illiquid? It should be floating in a veritable sea of liquidity instead of scrounging around to pay for loans which are coming due.

Here are some recent instances which indicate extreme desperation at 1MDB.

First, there was talk that power assets under Edra Global Energy will be listed to raise money for beleaguered 1MDB. But then with all the negative news coming out, the initial public offer or IPO seemed to be all but jettisoned.

In a surprise development, it was announced that CIMB Group Bhd had been appointed by the Ministry of Finance (MOF) in a role that would “include identifying potential buyers and running a competitive process for Edra to derive an optimal outcome for MOF.”

And then in an even more surprising development a week later, it was announced that CIMB Group will not serve as advisers to the MOF on the potential sale of Edra after the MOF decided it will no longer consider the sale of Edra to strategic investors.

“CIMB has been informed that MOF has decided not to consider a sale of Edra to strategic investors and as such, CIMB’s services as adviser to the potential sale are no longer required,” said the group in a short statement.

The MOF said that Edra will proceed instead with an application to list on Bursa Malaysia. In a space of one week, CIMB Group had a mandate and then did not have one to identify potential buyers for Edra. Strange to say the least.

The MOF also appointed Deutsche Bank and Malayan Banking (Maybank) as advisers for the IPO.

That in itself raises problems of conflicts of interest because both Deutsche and Maybank have lent money to 1MDB and it may be very likely that the proceeds of the IPO will be used to repay part of this debt.

It has been widely reported that Deutsche has given 1MDB close to US$1 billion (about RM3.7 billion) in bridging finance while Maybank was reportedly involved in part of a RM2 billion facility which had come up for repayment in February.

A businessman, not an investment banker

The government in a reply in Parliament said that tycoon T Ananda Krishnan had helped to arrange RM2 billion in loans from private investors to settle the RM2 billion due in February. Strange that Krishnan had to arrange this – as far as we know he is still a businessman and not an investment banker.

The government said that 1MDB still owed local banks RM5 billion. Sources say that Maybank is probably still a lender to 1MDB or its subsidiaries. The government also said that it had extended a standby facility of RM950 million to 1MDB.

And recently Reuters reported that part of the proceeds of a US$2 billion international sukuk issue will be used to pay off 1MDB’s borrowings, in particular a US$1.25 billion sukuk issue by 1MDB which matures in June.

That’s a lot of money that various bodies are scrambling to provide for 1MDB.

Back to the IPO for Edra now. Depending on which report you believe, 1MDB is targeting to raise as much as RM8 billion to RM10 billion from the IPO. That means it has to sell most of its stake in Edra, the company in which the power assets are vested.

Reports say that 1MDB’s stake would be whittled down to a mere 20 percent after the IPO. And it still would not have been able to pay for all of the power assets which cost some RM13 billion. It becomes a mere one-fifth shareholder in Edra and will still have to service loans resulting from the power assets purchase – a poor state to be in for a strategic development company.

Basically, the situation is dire. What is needed now from 1MDB is to disclose its detailed balance sheet as of today. How much borrowings does it exactly have? From whom, outstanding amounts, repayment terms.

What are its assets? Detail all the investments it has to account for its RM46 billion in borrowings. In what form are the assets held and where? Do an audit to ensure what all those assets are.

From such simple accounting it will be easy to ascertain how much of money is still at risk, how much cannot be accounted for and how much of provisions for loss is necessary. It really is quite easy and fast to do something like that.

What’s the reason for not doing that? Can we be excused for thinking that 1MDB’s problems are much deeper than what has been disclosed so far?

P GUNASEGARAM is founding editor of business news and views portal KiniBiz.