Friday, May 05, 2017

Incoming RM42 billion taxpayers' bailout: Bandar Malaysia deal collapse, sale of Edra Energy at a loss and 1MDB-IPIC “settlement” mark total failure of 1MDB “rationalisation exercise”

The entire 1MDB “rationalisation exercise” announced as “completed” by the Prime Minister on 2016 New Year’s Day has been completely unravelled with the latest announcement that the RM7.41 billion sale of 60% equity interest in Bandar Malaysia has collapsed.

The Government of Malaysia, together with its debt-stricken wholly-owned subsidiary, 1MDB has embarked on the above exercise to shed itself of its mountain of borrowings, which at its peak, exceeded RM50 billion.

The rationalisation exercise commenced with the sale of 1MDB’s wholly-owned subsidiary, Edra Energy Sdn Bhd, which held all of 1MDB’s energy assets.  Edra Energy had acquired the power plants for a total of RM12.1 billion.  In addition, the Government of Malaysia had subsequently extended of concession period of the above plants, as well as awarded several new power plant concessions to 1MDB.

However, despite a global open tender, 1MDB could only secure the best bid of RM9.83 billion which resulted in a direct loss of RM2.27 billion.  The losses did not yet include the interest cost of funds borrowed to finance the above acquisitions which amounted to more than RM3 billion over the period.

Worse, the proceeds of the above sale of Edra Energy did not go towards the repayment of the US$3.5 billion worth of bonds which were raised for the power plant acquistion in 2012.

As a result, in a recently announced “settlement” agreement with International Petroleum Investment Corporation (IPIC), who guaranteed the US$3.5 billion worth of bonds, the Ministry of Finance (MOF) had agreed to assume the liability of the US$3.5 billion bonds and relieve IPIC of their obligations.

This had come as a complete shock to Malaysians as 1MDB and the Finance Ministers had previously insisted that 1MDB had already made payments amounting to US$3.51 billion to IPIC and/or its subsidiaries between 2012 and 2014.

Hence the outcome of the “settlement agreement” was that Malaysians will have to foot US$7.01 billion to discharge ourselves from the US$3.5 billion of 1MDB borrowings which 1MDB took to acquire the above power plants.  The power plants, in turn have already been disposed of, but without the proceeds from the sale being used to settle the US$3.5 billion bonds.

Now with the latest collapse of the proposed sale of 60% interest in Bandar Malaysia to the consortium led by Iskandar Waterfront Holdings Bhd (IWH), the entire “rationalisation” exercise architected by Arul Kanda and hailed by the Prime Minister and Cabinet has been completely unravelled.

The devastating implication of the rationalisation failure staring at our faces is staggering.  Because 1MDB simply does not have any more substantial tangible assets or cash in its books, the Malaysians tax-payer will have to pay for most of 1MDB’s still-outstanding debts including:

(i)             RM5 billion 30-year bond guaranteed by the Federal Government issued in 2009;
(ii)           US$3.5 billion 10-year bonds issued in 2012, now guaranteed by MOF Inc.;
(iii)          US$3 billion 10-year bond issued in 2013, guaranteed with a ‘Letter of Support’ issued by the Minister of Finance, Dato’ Seri Najib Razak;
(iv)          US$1.23 billion borrowed from IPIC in 2015, guaranteed by MOF Inc,;
(v)            RM800 million loan from SOCSO in 2010, guaranteed by the Federal Government; and
(vi)          RM2.4 billion sukuk issued in 2013, which have already been assumed by MOF

The above sums up to RM8.2 billion and US$7.73 billion, or a combined total of RM41.7 billion

While I have called for Arul Kanda, the 1MDB President and CEO to resign or be sacked yesterday, it is the Prime Minister, Dato’ Seri Najib Razak who must be ultimately accountable.

He is not only the official with the ultimate decision-making authority in 1MDB as specified in the company’s Memorandum and Articles of Association, his promises of resolution of the above scandal without a bailout by the Malaysian Government have been irredeemably broken.

What’s more, banking documents exposed by the United States Department of Justice (US DOJ) have shown Dato’ Seri Najib Razak to have received in his personal bank account in Malaysia, the sums of US$731 million originating from 1MDB.  He has never denied the US DOJ allegations and steadfastly refused to provide any explanations to the Parliament or the Malaysian public.

With Dato’ Seri Najib Razak’s iron-grip control over UMNO and Barisan Nasional, the country’s legislative, enforcement and prosecution institutions, it is now up to Malaysians to sack the Prime Minister in the coming general elections to ensure that he is made accountable for the single biggest financial scandal in the history of Malaysia.
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