Tuesday, June 30, 2015

1MDB Denies IPIC Indemnification, Yet Another Saga of "Twist and Turn" Replies

Is 1MDB saying that IPIC misled the London Stock Exchange by announcing that the Ministry of Finance had indemnified IPIC in relation to the advance of US$1 billion and future additional payments on behalf of 1MDB?

1Malaysia Development Bhd (1MDB) has denied outright my allegation that the Malaysian Government has effectively provided a guarantee of up to US$4.71 billion or RM17.7 billion to Abu Dhabi’s International Petroleum Investment Corporation (IPIC).

I had alleged yesterday that the guarantee was provided in order to secure the agreement for IPIC to advance US$1 billion to 1MDB to settle its immediate outstanding loans, pay interests on 1MDB’s behalf for US$3.5 billion of bonds.

In addition, subject to the “transfer of assets” of “the aggregate value” of all of the above together with the US$3.5 billion bond by 30 June 2016, IPIC will also take over the bonds from 1MDB.

However, 1MDB swiftly denied the allegation, claiming that “neither the Ministry of Finance (MOF), nor the Government of Malaysia, have provided guarantees for the recent commercial transaction between 1MDB and IPIC.”

However, in its absolute denial, 1MDB made no reference at all to the fact that IPIC’s announcement clearly stated “1MDB and MOF have agreed to perform the obligations contemplated in the binding term sheet and to indemnify IPIC and Aabar for any non-performance, and vice versa.”

According to the Collins English Dictionary, “indemnify” means both 1MDB and MOF signed a binding term sheet agreeing “to secure against future loss” or “to compensate for loss” by IPIC.

In simple terms, if 1MDB fails to transfer the necessary assets of the required “aggregate value” to IPIC by 30 June 2016, MOF will be required to repay IPIC at the very least, whatever advances IPIC has made by that date. That will include the US$1 billion advance already paid, and an estimated US$209.7 million worth of interest incurred by the bonds over the next 12 months.

If IPIC were to further assume the US$3.5 billion of bonds, it would mean the MOF would have to indemnify an additional US$3.5 billion to IPIC. That will total up MOF’s contingent liabilities in the agreement up to US$4.71 billion!

The very simple question for 1MDB to answer then is, are they saying that IPIC misled the London Stock Exchange and its bondholders by claiming that MOF provided an indemnity to IPIC over the above “binding” agreement?

1MDB further alleged that I had “deliberately misled the public by failing to mention the crucial ‘and vice versa’ clause in relation to the ‘indemnity’, i.e. the indemnity applies both ways – to IPIC as well as 1MDB – in relation to performance of obligations by the parties”.

This is the classic misdirection tactic utilised by 1MDB whenever they are faced with difficult questions. I never disputed that IPIC also provided a “vice-versa” indemnity. But all the indemnity amounts to is the fact that IPIC has to advance the US$1 billion and pay for the year’s worth of interest, or 1MDB would not need to fulfil its part of the bargain on the “transfer of assets”. There is absolutely no loss involved for IPIC in such an event.

What’s more, IPIC has already fulfilled its obligations to advance US$1 billion to 1MDB and has “has assumed the obligations to pay (on an interim basis) all interest due under two IPIC guaranteed 1MDB financings”. Hence the question of IPIC indemnifying 1MDB is moot.

However, the MOF indemnifying IPIC isn’t moot. The indemnity effectively means MOF has guaranteed to pay IPIC in the event 1MDB fails its part of the bargain by 30 June 2016. The IPIC announcement was written as plainly in English as possible for the London Stock Exchange, targeted presumably at an English-speaking financial community.

Finally, if MOF was not needed to indemnify IPIC, then why should MOF be a party to the binding term sheet in the first place? If it is strictly a “commercial transaction” as claimed by 1MDB, why wasn’t it just between 1MDB and IPIC alone?

Once again, 1MDB should stop twisting and turning in its replies, or it will end up with eggs on its face again, just like the “redeemed” “units”, “cash” or “assets” farce.

Tony Pua

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