Friday, March 13, 2015

Minister Of Finance II Completely Deluded To Think IPO Can Solve 1MDB's Cashflow Problems

Minister of Finance II must be completely deluded to believe that an Initial Public Offering (IPO) of 1MDB’s energy subsidiary will solve 1MDB’s cashflow problems.

The Second Minister of Finance, Dato’ Seri Ahmad Husni Hanadzlah told the Dewan Rakyat that the government is hoping that the initial public offering (IPO) from 1MDB's energy arm would be able to pay for the company's growing debts.

"1MDB's stumbling block is it's cash flow. But once the IPO is up, this would be settled," he said.

Dato’ Seri Husni must be completely deluding himself, or has been deluded by 1MDB to actually believe that the IPO of 1MDB’s energy arm will rescue the RM42 billion indebted Ministry of Finance subsidiary.

1MDB had spent a total of RM12.1 billion to acquire 3 power companies – RM8.5 billion for Tanjong Energy Holdings (TEH) (22 May 2012), RM2.38 billion for Genting Sanyen (22 Oct 2012) and RM1.23 billion for Jimah Ventures (21 June 2013).  These assets have already been impaired by RM1.19 billion in the March 2013 Financial Statements, leaving them with a RM10.9 billion in value.

To acquire these companies, 1MDB had borrowed RM6.7 billion and US$1.75 billion for THE, RM700 million and US$1.75 billion for Genting Sanyen and RM600 million for Jimah Ventures.  Based on current exchange rates, these loans amounted to a whopping estimated RM20.9 billion of loans!

In short, 1MDB took RM20.9 billion of loans to acquire its power assets worth only approximately RM10.9 billion.  Part of the reasons for the outsized loans is due to the nature of the Goldman Sachs-sponsored bond exercises which involved an incredulous 11% in “commissions, fees and expenses”, as well as the highly onerous terms placed by International Petroleum Investment Corporation (IPIC) which provided the guarantee for the US Dollar-denominated bonds.

Hence 1MDB has been desperate to list its energy subsidiary in order to pare down these excessive loans.  Unfortunately because 1MDB is faced with the double-whammy of having overvalued these assets when they were acquired.  As a result, it became extremely difficult to secure a significantly higher valuation despite the numerous lucrative contracts and extensions which the Government has awarded 1MDB last year.

Therefore even with a generous RM12 billion valuation for 1MDB’s energy arm at its IPO, by 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.

In his Parliamentary reply, the Second Finance Minister also argued that “the investment body's remaining debts will be settled by monetising assets such as the Tun Razak Exchange, Bandar Malaysia, and other landbanks in Penang.”
Unfortunately for Dato’ Seri Husni, the valuation of properties in the books of 1MDB is worth only RM7.08 billion as at 31 March 2014.  Even this figure has been significantly inflated with a whopping RM3.95 billion upward revaluation from 1MDB’s cost of RM3.13 billion.

Again, even if 1MDB was to be able to successfully sell all of its land with a generous 20% premium to the current inflated valuation, 1MDB can barely raise another RM8.5 billion in funds.

As the Second Finance Minister testified in the Chambers, the energy and real estate arms are the only 2 core 1MDB businesses.  Even in the event where 1MDB is able to successfully list its energy subsidiary and sell its landbank at premium prices, the financially stricken company can only raise barely RM18 billion to repay its RM42 billion debt recorded as at 31 March 2014.  Worse, the drastic deterioration of the Ringgit and additional loans which 1MDB may have taken during the year may have brought 1MDB’s total debts closer to RM50 billion.

It is for this reason that the Federal Government should not extend bailout funds to 1MDB because it would be a case of throwing good money after bad.  Perhaps it is now worthwhile for the Finance and Prime Minister, Dato’ Seri Najib Razak to honour what he has promised Malaysians when he told the Parliament in October last year, that the Government will only be responsible for the RM5.8 billion of 1MDB’s loans which it had guaranteed, even if 1MDB were to go bankrupt.

That way, the cost to tax-payers as a result of the sheer incompetence, mismanagement and embezzlement in the 1MDB misadventure can be limited to just RM5.8 billion.

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