Lim Kit Siang

Malaysia’s 1MDB at Risk of Default as Partner Ends Bond Support

Shamim Adam
Bloomberg
April 18, 2016

Malaysia’s troubled state investment company faces the threat of default after a dispute with an Abu Dhabi sovereign wealth fund leaves bondholders waiting for an interest payment due Monday. 1MDB’s dollar bonds slumped.

Abu Dhabi’s International Petroleum Investment Co. said its obligations of financial support to 1Malaysia Development Bhd. have ended after the company and Malaysia’s finance ministry failed to pay it more than $1 billion, according to a stock exchange filing. IPIC, which agreed last year to pay interest for 1MDB bonds that it guaranteed, didn’t mention the Monday payment due.

1MDB said bondholders haven’t been paid, and didn’t say if it would do so. The Malaysian finance ministry said it had been informed by 1MDB of the dispute, and “wishes to make clear that it will continue to honor all of its outstanding commitments in the financial markets.”

Failure for either side to fulfill the debt obligation could result in the first default for 1MDB since its inception in 2009, deepening its troubles at a time when it’s the target of global investigations into allegations of money laundering and embezzlement. Authorities from the U.S. to Switzerland are trying to determine if some of the billions of dollars that 1MDB raised were siphoned out inappropriately.

‘In Default’

IPIC entered an agreement with 1MDB in May 2015 where it would provide the Malaysian fund $1 billion to settle some liabilities in exchange for a transfer of assets, as well as assume interest obligations on $3.5 billion of debt. 1MDB and its shareholder, Malaysia’s finance ministry, “are in default” on the terms of the binding term sheet with IPIC and its unit, the Abu Dhabi fund said, adding that it has met all its obligations to date.

“1MDB and MOF continue to be bound by their respective obligations under the terms of the Binding Term Sheet,” IPIC said Monday. That includes indemnifying IPIC and its unit Aabar Investments PJS for any claims against it over guarantees it gave for bonds issued by 1MDB, it said.
1MDB amassed more than 50 billion ringgit ($12.7 billion) of debt over six years, using some of it to buy energy assets, including joint ventures with companies in Saudi Arabia and Abu Dhabi. 1MDB said in a separate statement on Monday it has repaid all short-term and bank borrowings, and has a 2.3 billion ringgit surplus.

Ample Liquidity

“1MDB wishes to make clear that it and its group entities will meet all of their other obligations under any other financing arrangements and have ample liquidity to do so,” it said.

1MDB’s dollar bond prices slumped on Monday to the lowest since November, according to Bloomberg-compiled prices. The yield rose 252 basis points to 8.27 percent. It was trading around 5.7 percent last week from almost 10 percent in October as graft allegations intensified.

IPIC last week denied ownership of a company known as Aabar Investments PJS Limited or Aabar BVI, which 1MDB said it sent payments of $3.5 billion intended for the Abu Dhabi fund. That came after a report by a Malaysian parliamentary committee this month that identified at least $4.2 billion of questionable transactions by 1MDB including those that involved the Abu Dhabi companies.

1MDB, whose advisory board is chaired by Prime Minister Najib Razak, has consistently denied any wrongdoing.

Islamic Bonds

The conflict with IPIC comes as Malaysia plans to sell as much as $1.5 billion of global Islamic bonds. The marketing of the notes started last week and would likely have maturities of 10 and 30 years, according to two people familiar with the matter.

Malaysia’s central bank warned the government as early as 2014 of risks to the financial system from 1MDB, Governor Zeti Akhtar Aziz said in an interview in Washington on Saturday. Bank Negara Malaysia issued two memorandums to the finance ministry, the sole shareholder, flagging the dangers of the fund’s mounting debt, Zeti said. She didn’t say how the ministry responded.

$681 Million Donation

The probes come amid a separate political scandal over a $681 million donation from the Saudi royal family that appeared in Najib’s bank accounts before the general election in 2013. Najib has denied any wrongdoing over the donation and the attorney-general has cleared him of any graft.
1MDB’s woes, along with questions over the money in Najib’s account have created the biggest threat to the premier since he came to power in 2009, though he has retained the support of the bulk of senior officials in the ruling coalition.

CIMB Group Holdings Bhd. said its Chairman Nazir Razak, who’s the prime minister’s younger brother, is taking a leave of absence as the lender reviews his role in distributing funds to politicians before elections three years ago. Nazir confirmed to reporters on Monday a report in the Wall Street Journal that he helped his brother disburse $7 million of funds to ruling party politicians.