Monday, March 16, 2015

Second Finance Minister Must Be Joking That 1MDB's Cashflow Problems Can Be Solved This Year

Dato’ Seri Ahmad Husni Hanadzlah must be joking to claim that 1Malaysia Development Bhd (1MDB) is facing only cashflow problems which will be resolved by the end of this year.

During the last parliamentary sitting, Deputy Finance Minister Datuk Ahmad Maslan assured Malaysians that 1Malaysia Development Bhd’s losses were temporary and “it will return to profitability” for the financial year ending March 2015.

The Deputy Finance Minister spoke to reporters during a press conference on 21 November 2015 after 1MDB reported its first annual losses of RM665 million for its March 2014 accounts.

As we approached the end of March 2015 financial year, the Datuk Ahmad Maslan prophecy of 1MDB making profits looks as remote as any attempt to grow money on trees.  It showed clearly that we had a Deputy Finance Minister who had no grasp of the subject matter.

We would have hoped that the Second Finance Minister, Dato’ Seri Ahmad Husni Hanadzlah who took over responsibility on responding to questions in Parliament on 1MDB last week, would do a better job.

Dato’ Seri Husni did well to at least, for the first time, concede that the current monster RM42 billion debt structure in 1MDB was “unsustainable” and admitted that 1MDB was facing a liquidity crisis.

However, the Second Finance Minister didn’t do his own credibility any good by insisting and prophesying, like his Deputy did, that 1MDB’s cashflow problems will be resolved by the end of this year.

Based on the current financial status of 1MDB, there is no possibility of the wholly-owned subsidiary of the Ministry of Finance ever resolving its cashflow problem this year, without at least a RM5 billion injection by the Government into the Company even with a possible initial public offering of the 1MDB energy division before anticipated in September this year. 

What’s more, such a sizeable injection will only prove temporary simply because come 2016, after selling off some 80% of its only profitable division in the IPO, 1MDB will have no income generating assets to service or repay its massive outstanding debt.

1MDB had taken RM20.9 billion of loans to acquire its power assets worth only approximately RM10.9 billion as reported in the company’s financial statements.  Therefore even with a generous RM12 billion valuation for 1MDB’s energy arm at its IPO, selling 80% of its stake will only raise RM9.6 billion which is barely half the value of the loans it took.  The IPO will not even be sufficient to clear the loans it has taken to acquire its energy subsidiaries, much less the balance of the RM42 billion loans.

Even 1MDB’s property wing is worth only RM7.08 billion as at 31 March 2014, after being upwardly revalued by RM3.95 billion in the last few years.  As admitted by Dato’ Ahmad Husni himself, 1MDB’s property projects will only take off at the earliest in 2016.

Despite the obvious facts staring at the Minister in the face, he had persisted in ludicrously defending 1MDB’s viability.  He said “The 1MDB is involved in long-term investment, so to reap profit from its investments will take some time.”  He also argued that 1MDB was facing cash flow problems not due to management problems or misappropriation.

My simple questions to the Second Finance Minister are two:

  1. What are these so-called 1MDB’s “long-term investment”?  After the proposed 80% disposal of 1MDB’s energy division, there’s nothing left in the company except for the RM7.08 billion of property assets.  If there are no investment assets left in 1MDB, how could it possibly generate “real profit” in the future to pay its debts?
  1. If there are no “management problems or misappropriation”, then how did 1MDB’s debts of RM42 billion as at March 2014 far outstrip its 2 key assets – RM10.9 billion in power and RM7.08 billion in real estate? That’s even assuming that the valuations for these assets are not overly inflated.  Where did all the rest of the money from its debt go?

The failure to honestly respond to this questions will severely dent the reputation of Dato’ Seri Husni Hanadzlah like that of his Deputy, and make him the butt of jokes for the international financial community.
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