KUALA LUMPUR (Dec 22): Under fire over its billions of ringgit of funds parked at the Cayman Islands, 1Malaysia Development Bhd (1MDB) yesterday said repatriating it back to Malaysia would have exposed the money to fluctuations on the foreign exchange market.

This follows the decline of ringgit by 6.5% in the past nine months to 3.48 against the US dollar.

In a statement yesterday, its board of directors chairman Tan Sri Lodin Wok Kamaruddin said to maintain a strong liquidity position with a truly diversified global portfolio, the funds were invested in a 1MDB subsidiary that was registered in the Cayman Islands.

"However, the company has already redeemed a significant portion, US$1.4 billion (RM4.87 billion), of the fund and expects to redeem the remaining amount in the coming months," he said.

1MDB, which calls itself a strategic development company, has been criticised by former prime minister Tun Dr Mahathir Mohamad, who noted that a large part of the money raised from the issue of debt paper by 1MDB has been sent to the Cayman Islands, a move which many, including the opposition, had also questioned.

Critics have complaint about the lack of transparency in how the money is managed out of the Caymans and it has been estimated that at least RM18 billion of 1MDB's money is parked there.

Lodin said there was nothing unusual about companies of 1MDB's size investing their funds in the Cayman Islands, pointing out that it is one of the largest registered fund jurisdictions internationally, with the Cayman Monetary Authority recognised as one of the leading fund regulators in the world.

"Thousands of international blue-chip companies have funds regulated by the Cayman Monetary Authority, including over 200 Malaysian companies," he said.

To clarify, he said in 2009, 1MDB and a Saudi Arabian company had entered into a joint venture (JV) to facilitate long-term economic cooperation between Malaysia and Saudi Arabia.

A JV fund was set up to undertake investments on projects which would generate financial and strategic benefits to both countries but due to various factors, both parties decided against it.

As a result, he said 1MDB’s investment in the company was converted into a fixed income instrument in the form of Murahaba notes, essentially a loan, with an annual interest rate of 8.75%.

He said the loan was paid back in full, for US$2.318 billion with a profit of US$488 million, in 2013.

"Repatriating these funds to Malaysia would have exposed them to fluctuations on the foreign exchange market, as being witnessed at the moment," he said.

Lodin also said he was surprised that both the media and certain individuals had suggested that the company has failed to respond to various questions that have been directed at it over the past months.

"As a board of directors, we welcome debate, and as a company that is wholly-owned by the Ministry of Finance – and by extension the people – we believe that public scrutiny of 1MDB is a good thing, and will only serve to strengthen the company and its governance," he said.

He said 1MDB had held meetings with the media and taken various measures such as issuing multiple statements responding to allegations directed at the company.

Apart from the Cayman Islands funds, Lodin also addressed several issues that was raised by the company's critics in the past few months, including its funding and debt levels.

Lodin said as a strategic development company, 1MDB raises and invests its own capital, and does not receive any funding from Putrajaya, beyond the RM1 million in equity it received when it was first set up in 2009.

This, he said is unlike a sovereign wealth fund which is directly funded by government and invests on its behalf.

"Given that 1MDB does not receive any funding from the government, it is therefore simply not true to claim that the company is investing or worse, wasting, the state’s – or the people’s – money," he said.

Lodin also noted that since 1MDB has to fund its own operations, the company would have to, from time to time, raise capital on the international debt markets to finance some of its projects.

However, he assured that all of the firm's debt is backed by "solid assets", which include 15 power and desalination plants in five countries as well as its property portfolio which includes 70-acre dedicated financial district Tun Razak Exchange and the urban mixed development of Bandar Malaysia in Kuala Lumpur, and 234-acres land in Air Itam, Penang.

He said total value of the company's assets stood at RM51.4 billion as of financial year end of March this year, which "comfortably exceeds" the value of its total debts of RM41.9 billion for the same period.

"This means that the company has net assets of close to RM10 billion, representing the value it has created since its inception five years ago.

"Furthermore, this does not take into account the expected benefit to be realised from the initial public offering of the group’s energy portfolio, which will help de-leverage the group and contribute towards reducing its debt profile," he said.

Lodin also addressed comparisons made by its detractors over the 5.75% interest rate for the RM5 billion Islamic bond issued by the company in 2009, with the RM100 million bond taken by national oil company Petronas, which only paid an interest of 3.6%.

In stressing that the comparison was unfair as it does not take into account numerous factors such as maturity rates, Lodin said Petroliam Nasional Bhd's bond only has a tenure of three years, whereas 1MDB's has a 30-year tenure.

"When subscribing to a bond, lenders take on a certain degree of risk and the longer the tenure, the higher the risk for the bondholder. Therefore, bonds that have a longer maturity period typically have a higher interest rate.

"As such, given the significant difference between the maturity periods, it should not be surprising that the bond issued by 1MDB had a higher interest rate," he further said, adding that 1MDB's bond was the first Malaysian bond with a 30-year tenure, and the first Islamic bond to be issued with a maturity period of that length.

On claims that the firm had overpaid to acquire its power assets, Lodin said the company believed that the value paid for those assets, which may have involved a premium in certain instances – as is common when acquiring another business, is commensurate with their existing and future potential.

He said since it first acquired its energy assets in 2012, 1MDB had become Malaysia's second largest independent power producer, with a strong international presence.

In total, 1MDB’s energy business has consolidated 5594MW of net capacity, comprising both gas and coal fired plants.

"This portfolio provides the business with healthy cash flows and enables 1MDB to participate in bids for coal and gas fired plants, the two primary fuel source for power generation assets in the markets that the company operates in, allowing it to create further value and drive future growth.

"As such, the economic benefit gained from these assets means that the company has recuperated any excess value it may have paid at the time of the acquisitions".

He also denied that 1MDB was given preferential treatment on power contract for a 2,000MW coal fire plant known as Project 3B, after claims surfaced that the company bid was not the lowest offered.

Lodin said such rationale was flawed as it failed to consider that any award was based not solely on tariff alone but on other factors such as experience, track record and bidding price.

On claims that the company had overpaid for the 234-acre Air Itam land, Lodin insisted that the amount paid by 1MDB was not only commensurate with its value but highly attractive especially since it is difficult to find such sizable plots that are suitable for large-tier development projects.

The company had paid RM1.38 billion for the land.

Lodin said other developers have paid to acquire land in neighbouring areas which, at over RM200 per sq ft, is substantially higher than what 1MDB paid.

"In fact, in one instance dating back to 2013, approximately 9.8ha in Air Itam were purchased for RM267.4 million, about RM251 per sq ft, for a mixed-use development. In another, approximately RM251 per sq ft was paid for a mixed development project near the Kek Lok Si Temple," he added.