1MDB “relying entirely on Malaysian government” to cover debts

Image: Jorge Láscar/CC BY 2.0 with changes.

By Holly Reeves

“[Najib] can no longer remain silent on this matter, this is the single largest default by any government subsidiary ever in the history of Malaysia,” says opposition MP Tony Pua as the world watches 1Malaysia Development Bhd (1MDB) bring the country to its knees.

This week, the debt-ridden Malaysian strategic development fund officially defaulted on a bond. It missed a $50 million interest payment, causing a cross-default on its 5 billion ringgit ($1.28 billion) sukuk – an Islamic bond – due in 2039, and a 2.4 billion ringgit sukuk due between 2021 and 2024.

And according to Tony Pua, there are, “obvious admissions by 1MDB that it will be relying entirely on the Malaysian government to bail out 1MDB on its burgeoning debt crisis.

“The event of default has been triggered which means that all bond holders will now have the absolute option to call on the Malaysian Government to pay up for its debts.

“Najib must provide a full and satisfactory explanation on the financial disaster taking place before our eyes and outline the steps that will be taken to remedy the situation.

Nothing yet from the ever-silent Najib Razak. But the fund’s CEO, Arul Kanda, ignoring the lines of emergency credit which Pua says the government extended the fund last year, already spoke out to shoot down the idea of taxpayers paying 1MDB’s bills.

“Now that we have legally binding agreements, for the IPIC swap, Edra sale and Bandar Malaysia, we don’t need to take any money from the government. There is no question about a bailout.

“And I contrast this with other companies. Most recently, Malaysian Airline System Bhd, or prior to this Proton, or Perwaja, or Bank Bumiputra, which required billions and billions of equity injection; we have not had to do that.”

But if investors crumble and come asking for their money the Malaysian government is tied by its guarantees. The total size of contingent liabilities associated with the Malaysian state fund’s recent default is around 2.5% of Malaysia’s gross domestic product, media reports said on Tuesday.

But let us not all hide our money under the bed just yet. In a statement, the development fund said this was an internal matter, not one of liquidity as, “whilst 1MDB has the funds to have made the interest payment, it is 1MDB’s position, as a matter of principle, that it was IPIC’s obligation to do so.

“Until IPIC accepts that all obligations have been met, 1MDB is obliged to withhold payments and will seek legal recourse and resolution.

“1MDB reiterates that it will meet all of its other existing financial obligations and has ample liquidity to do so. 1MDB withheld the interest payment following claims by IPIC that certain payments and other obligations were still owed it.”

On the other side, IPIC claims it is entitled to be indemnified by the Malaysian government on all amounts paid out in respect of the notes. That could be a bill for $6 billion, say reports.

Where would that kind of money come from? State funds. So, taxes. That means the pockets of ordinary Malaysians.

But the scandal now has evolved long past the money. It is about the country. And its tattered international reputation.

Around the world Malaysians, and their business partners, are being tainted with the stench of corruption investigations from Singapore to Switzerland, via the US.

In one of the most low-key of the current investigations, the US Justice Department’s “kleptocracy asset-recovery unit” is looking at allegations of embezzlement, says Reuters.

Add to that, US prosecutors recently subpoenaed Tim Leissner. He is the former Goldman Sachs banker who oversaw bond sales for 1MDB, and the FBI in New York is apparently probing whether any US laws were broken in his dealings.

To be clear, Goldman Sachs itself is not currently under investigation. However, the terms of its dealings with 1MDB are raising eyebrows.

Although it admittedly put its own capital at risk, the American investment bank earned commissions and expenses of nearly $600 million from 1MDB for issuing bonds. That is more than 9% of the proceeds and well above what the industry might expect.

There is no comment from Goldman Sachs on the terms of the deal. In fact, there is very little comment from anyone in authority on anything. That is why front pages blew up this week at a supposed admission of fraud by Kanda but he was, apparently, misreported.

He bounced back saying, “I must clarify that I had never ‘admitted there was fraud’, as has been mistakenly alleged by various personalities and subsequently wrongly reported by certain media.

“What I did say is that, given the content of the 12 April 2016 statement by the Office of the Attorney General of Switzerland, 1MDB must now be open to the possibility of fraud; that is, that it cannot be discounted.

“It is regrettable that various personalities have chosen to ‘spin’ my words to further their own agendas.”

For the moment, Najib is probably safe. Although the noise of the scandal is still loud IPIC have paid the defaulted $50 million bond interest payment. Bank Negara Malaysia, the Malaysian central bank, is closing their inquiry – though that is because 1MDB is paying a fine, not because it is clearing its name. No charges of embezzlement or money laundering have yet emerged from any overseas authority.

But another $52.4 million interest payment is due on 11 May. And the market remains nervous – a sukuk bond issue last week came in at an unimpressive 3.8% yield.

If the fallout from this debt default widens, and 1MDB bond holders come knocking, then a bailout from the government simply cannot be ruled out. Malaysia just cannot afford the risk of investors going cold when the government asks the market to raise capital.

Perhaps a bailout is the only way to save Malaysia and its reputation. And yes, it might well save the country’s blushes, but reaching into the people’s pockets might finally also sink Najib.