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.