Tuesday, April 26, 2016

In the face of 1MDB's enormous debt, Malaysians need to brace themselves for government bailout of at least RM20 billion

1. The Rationalisation Plan of 1MDB announced in May last year was always like a house built on sand. 

1MDB  noted  in  its  press  statement  this  morning  that “1MDB  now  retains  a  cash surplus  of approximately RM2.3 billion  for  infrastructure  and  other  debt  service requirements. Future debt obligations  are  fully  matched  by  the sale of Bandar Malaysia  land,  the  development  and  sale of TRX lands  as well  as  the  eventual monetisation of the Pulau Indah and Air Itam lands.”

We have always maintained that the 1MDB Rationalisation plan was built on sand as we  were  never convinced  that  the  US$4.7  billion  debt-asset  swap  plan  will  be successful. This was because it was clear from 1MDB’s financial statements and the events  which  took  place  over  the  past  year showed  that  1MDB  does  not  have equivalent amount of assets to “swap” with IPIC’s assumption of 1MDB debt.

The  lack  of  conviction  was  made  more obvious  by 1MDB’s  refusal  to  provide the Auditor-General  with  the  necessary  documents  to  verify the value  or  even the existence of 1MDB’s overseas cash and assets.

Hence  the  continued  insistence  by 1MDB  that “further  debt  obligations  are  fully matched by the sale of Bandar Malaysia land...” etc., especially after the collapse of the  IPIC-1MDB agreement  is an  irresponsible  attempt  to continue  play  a  game of smoke and mirrors.

In  addition, we  also  have  doubts  on  the  ability  of  the  Iskandar  Waterfront  led consortium’s ability  to  complete  the  purported  RM7.42  billion  for  the 60%  stake in Bandar Malaysia. Based on Iskandar Waterfront’s financial statements for December 2013, it only has net assets of RM3.46 billion.

2. 1MDB’s failure to repay US$50 million of interest will cause cross default. 

1MDB in its latest statement is also attempting to play down the impact of its default on the US$1.75 billion bond issue where it has failed to pay for the US$50 million of bond interest due.

1MDB  has  confirmed  cross  defaults  have  been  triggered  on  the 1MDB  RM5 billion Sukuk due 2039 (“1MDB  Sukuk”)  and  the  RM2.4  billion  Bandar  Malaysia  Sdn  Bhd Sukuk due between 2021 and 2024 (“BMSB Sukuk”).

1MDB  said  there  is  no  cross  default  on  an  RM800  million  loan  from  the  Social Security Organisation (“SOCSO  Loan”)  although  there  is  a  possibility  that  the “material  adverse  effect” clause  may  be  triggered  due  to  the  developments highlighted above.

1MDB further added that “the 1MDB Sukuk and the SOCSO Loan both benefit from guarantees issued by the Government of Malaysia.”

This is another obvious admission that 1MDB will be relying entirely on the Malaysian Government to bail out 1MDB in 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 upon the Malaysian Government to pay up for its debts.

The Minister of Finance cannot continue to remain silent on this matter as this is the single largest default by any Government subsidiary ever in the history of Malaysia. Dato’ Seri Najib Razak  must provide  a  full  and  satisfactory explanation  on  the financial  disaster  taking  place  before our eyes and  outline  the  steps  which  will  be taken to remedy the situation.

This is especially since 1MDB and Dato’ Seri Najib Razak has repeatedly denied any need for Government bailouts despite repeated warnings by opposition critics.

3. Malaysian  Government  will  ultimately  bear  the  burden  of  all  advances, interests and bonds guaranteed by IPIC. 

Under the debt-asset swap arrangement with IPIC, the agreement clearly states that the Ministry of Finance will indemnify IPIC of all its obligations including its advances and payments of interest on behalf of 1MDB.

What  is  further  highlighted  in  the  Public  Accounts Committee  report  (page  62),  as pointed out by  the  Auditor-General  was  that  1MDB  had  provided  a  back-to-back guarantee on IPIC’s guarantee.

“Dalam Interguarantor  Agreement  yang  ditandatangani  antara  1MDB  dan  IPIC bertarikh 21 Mei 2012, 1MDB  dikehendaki  mendapatkan  Ministry  of Finance  Inc., untuk  melunaskan  semua principal  dan  kos  berkaitan  yang  telah  didahulukan  oleh IPIC  sekiranya  1MDB  gagal melaksanakan   obligasinya  sebagai penjamin... Di samping  itu,  syarat  dalam Interguarantor Agreement  tersebut  adalah  bertentangan dengan  surat  kelulusan  daripada  Menteri  Kewangan bertarikh  26  Mac  2012  dan  3 Ogos  2012  yang  menyatakan  bahawa  terbitan  kedua-dua  Nota USD  itu  diluluskan tanpa jaminan kerajaaan.”

Hence ultimately, it is clear that 1MDB is continuing to play a poker game even after its cards have been fully revealed to be duds. The refusal to pay the US$50 million interest may force IPIC to repay the US$1.75 billion of bonds it guaranteed on behalf of 1MDB.

However, ultimately, IPIC  will  make  the  claim  on  the  Malaysian  Ministry  of  Finance based  on the  inter-guarantor  agreement. Will  Dato’ Seri Najib Razak  refuse to honour 1MDB’s  agreement with  IPIC,  the  sovereign  wealth  fund  of  the  Abu  Dhabi Government?

4. Arul  Kanda  has  finally  admitted  not  only  possible  fraud,  but  also  possible collaborators from 1MDB. 

"What we cannot discount is there could actually be fraud... a massive fraud... and maybe  there  was  collaboration  from  our  side,"  Arul  Kanda told The  Edge  Financial Weekly in a cover story interview.

Arul Kanda has finally admitted to a point we have been alleging for nearly 2 years, that  there may be  systematic  fraud,  deception  and  misappropriation  in  1MDB resulting in billions of dollar of losses.

His admission  now  requires him  to  make  a  police  report  to  disclose  what he  knows and demand the authorities to investigate the possible fraud claims. He must do so now in order to ensure that he will not be found to be complicit in the covering up the entire fraud in any subsequent investigations.
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