1MDB fire sale reeks of desperation

by Khairie Hisyam
Kinibiz
November 24 2015

The open secret that 1MDB is selling off its power assets to foreign hands is now out, and now all eyes are on its attempts to divest a majority stake in its Bandar Malaysia project. The entire exercise reeks of the desperation that is driving the company.

On Nov 23, 1Malaysia Development Berhad (1MDB) finally made an unsurprising announcement: China General Nuclear (CGN) has won the bidding for its power assets, offering nearly 25% higher than local power player Tenaga Nasional Berhad.

The sale is understandable – 1MDB is desperate for cash. It has RM42 billion in borrowings that it is finding very hard to service. However, the sale of its only cash cow reeks of desperation and raises questions on just how deep is the hole 1MDB is in right now.

According to 1MDB, CGN is paying RM9.83 billion for its power assets held under Edra Global Energy. Payment is cash, which is music to the ears of those tracking 1MDB’s long trail of questionable deals over the years where it got into convoluted deals that often involve payments that are not cash.

As an aside, the sale brings full circle what was a contentious and questionable generosity – recall that 1MDB overpaid by several billion ringgit for the power assets which cost a total of RM12 billion, excluding the upcoming Track 4B 2,000MW power plant in Malacca.

It bears repeating here that immediately after the purchases, 1MDB impaired RM1.2 billion in its accounts as recognition of goodwill for the energy assets. 1MDB had already incurred that amount of loss from the purchase of one of the power assets. And now it will have to incur a further RM1 billion plus in losses from the sale to CGN too.

1MDB power plant generic featured imageWhat was so strategic about acquiring power assets from established Malaysian independent power producers at a ridiculous premium, reselling it for a loss, and in the process putting power assets and expertise into foreign hands?

The other question that arises is why China state-owned CGN willing to pay what is perceived to be 25% higher than market prices for the assets. Since this is virtually a government-to-government deal with both parties being government owned, could there be a quid-pro-quo somewhere else?

There is even now talk of Chinese interest in the Bandar Malaysia sale and the Kuala Lumpur-Singapore high-speed rail project, estimated to be closer to RM60 billion in worth compared to original projections of circa RM40 billion.

Of course, despite the pointlessness of the entire saga this deal remains significant. Along with getting RM9.83 billion in cash, 1MDB’s debt burden is also lightened by about RM8 billion, which represents the debt attached to the power assets. Effectively, if cash obtained is used to pay debts, nearly RM18 billion will be cleared (RM9.83 + RM8) and 1MDB is left with “a mere” RM24 billion or so in borrowings to think about.

But the disposal of its power assets may also put 1MDB in a more difficult situation despite a relatively lighter borrowing burden. Its only real cash flow stream comes from the power assets – without them, where will the money come from?

It’s not easy to establish with certainty how much of 1MDB’s net earnings come from energy (bearing in mind it is essentially a loss-making entity year after year before paper gains from land revaluation are imputed) but in the 2013 financial year ended March 31, 2013 (FY13), the power assets contributed 80% of 1MDB’s revenue.

This proportion more or less remained intact at 77% for FY14. With four-fifths of its revenue source essentially going away soon, the remainder RM24 billion in borrowings cast dark clouds over 1MDB despite the RM9.83 billion in cash that it gets from selling the power assets. Can it really service the remaining debt?

However, this is where some perspective vis-a-vis 1MDB’s overall rationalisation plan aids. The plan, according to 1MDB in February, is basically to monetise the power assets and spin off its core businesses into standalone entities. In other words, 1MDB on its own will eventually be wound down.

So here we have the power division not only being monetised but sold off entirely to help pay down borrowings. That leaves the real estate portion of 1MDB as the remaining core business – the Bandar Malaysia development and the twin project Tun Razak Exchange (TRX).

Bandar MalaysiaThen again 1MDB is currently looking to sell off 60% equity in its wholly owned Bandar Malaysia development. The company said on Nov 12 that it is now considering two “final, binding and fully funded bids” for the stake.

Bandar Malaysia is an immense undertaking with an estimated gross development value GDV) of as high as RM40 billion. Among other things, the site will see the terminus for the proposed Kuala Lumpur-Singapore high-speed rail located here, no mean plus point for its developer.

Letting go of a majority stake in the project essentially means 1MDB, a government-owned company, is relinquishing control over its future direction as well as a big portion of future profits – a regrettable outcome considering 1MDB originally bought the land cheaply from the government for its “strategic” initiatives.

The irony is that in the end, the strategic sale of this majority stake would un-strategically lead to private entities, potentially foreign, reaping the ultimate benefit and profits from what was public land, strategically divested on the cheap by the government to a government-owned company to drive strategic development in the country for strategic public interest.

1MDB Tun Razak Exchange TRX landscape image 130814In any case, does becoming a backseat shareholder count as having a core business? Probably not. This leaves only the TRX development, for which GDV estimates also rise as high as RM40 billion, for 1MDB.

To be fair, 1MDB have not stated that it intends to sell off this project too, with the implication being that its subsidiary 1MDB Real Estate is likely to remain in the driving seat.

However, 1MDB had also been selling off portions of land from the 486-acre project site. Recall the controversy over Tabung Haji’s RM188 million purchase of a 1.56-acre plot as well as Retirement Fund Inc (KWAP)’s reportedly RM1 billion deal for a 40-storey building and land at TRX earlier this year.

Since then, we have had Affin Bank buying half a hectare of TRX land for RM255 million; and WCT buying a 70-acre plot for RM223 million in a deal attached to its RM755 million infrastructure job win at TRX.

It may seem normal. But the question that needs to be asked is whether it is such a good idea for a normal developer to sell off parts of its own development land when what it should be doing is to execute its development plan and sell the completed structures for even higher profit.

Plainly put, that 1MDB is selling off land parcels now as opposed to reaping the higher, longer-term profits from selling completed property indicates that it cannot afford to wait that long – it needs cash now, as evident from its slaughter of its only cash cow for the meat and letting go of a majority stake in Bandar Malaysia.

In other words, we now have a government-owned, self-styled strategic development company forced to sell off its assets to pay a mountain of borrowings. We can only assume much of the proceeds are earmarked to meet debt obligations as they come due.

This comes after past controversies on overpaying for the power assets in the first place as well as strings of dodgy deals, which KINIBIZ had been tracking for years.

All this points to a troubling question: how did 1MDB get into a situation so dire? And who should be taken to task for running a government-owned company into the ground, having racked up tremendous amounts of borrowing that may fall to the government – and by extension the public – to service in whole or in part if insufficient cash is raised in the end?

Not helping matters is the current delay in 1MDB’s FY15 annual accounts, for which the Companies Commission had recently granted a six-month extension to the company to submit after having missed the original six-month deadline that ended on Sept 30.

This is not the first time its accounts have been delayed. In fact every single one of its accounts since inception have been delayed.

Taken together, the entire mess spells deep trouble that reeks, even to observers from across the seas judging by growing foreign media interest and reported foreign investigations into 1MDB-related matters. With what limited information is available we can only assume the real situation is far worse than it seems.

As 1MDB president and group executive director Arul Kanda previously said, it is easy to say any number of things in hindsight in dismissing much criticism against the company. However, it is with hindsight that we discover mistakes and make people be accountable for that so that we may bring the lesson forward with us to progress.

That means the public deserve full disclosure from the government and 1MDB itself, immediately, of all available facts concerning the company.

How did it use its billions in borrowings if the only cash-generating assets had been mostly the power business, which cost only RM12 billion or so to acquire? Where were the rest? Who made the ultimate decision on so many questionable and ultimately disastrous ventures? Was there money siphoned off?

In the end what has 1MDB really achieved in its seven years or so of existence but squander borrowed money?

And full disclosure must be accompanied by a truly independent investigation – followed by action without fear or favour – on what really transpired in an episode which must eventually go down in history as another national disaster that unfolded before our very eyes.

GRRRRR!!!