‘Additional obligations’ loom over 1MDB

This article first appeared in The Edge Financial Daily, on August 8, 2017.
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KUALA LUMPUR: At noon today, 1Malaysia Development Bhd’s (1MDB) five-business-day grace period to pay Abu Dhabi’s International Petroleum Investment Co PJSC (IPIC) a total of US$628.75 million (RM2.69 billion) will expire.

It is a deadline that 1MDB is likely to miss. In turn, IPIC is expected to impose punitive measures against the strategic investment fund — additional interest charges for the delay.

However, the tardy payment alone should not scuttle the US$1.2 billion settlement agreement between the two state-owned funds; as long as 1MDB is able to make the payment within a reasonable time frame.

Thus far, 1MDB has indicated that it needs at least another month until the end of August to arrange for the funds to make the said payment. While it did not provide an exact date, 1MDB said last week that the payment would have to be delayed till, “August 2017”, due to “additional regulatory approvals”.

Under the settlement agreement that 1MDB had with IPIC in April, 1MDB has to repay IPIC the owed US$1.2 billion over two payments. The first payment of US$602.725 million plus US$26.025 million in interest was due on July 31 at midnight, New York time. The second payment is due on Dec 31.

1MDB claims it has enough funds to meet these obligations as well as its other debts, via its asset rationalisation plan. Namely, the monetisation of its fund units held under Brazen Sky (reportedly US$940 million) and 1MDB Global Investment Ltd (estimated US$1.5 billion).

1MDB’s statement last week implied that the money for payment is available, but cannot be deployed yet due to regulatory and compliance issues.

Last week, Prime Minister Datuk Seri Najib Razak told Parliament that the missed payment was due to a “technical matter”. He also said that the late payment is not expected to impair investor confidence in Malaysia.

Nonetheless, the market will be closely monitoring IPIC’s response if these “technical matters” persist beyond August. It will not only be from investors with interests in Malaysia, but investors who hold part of the US$3.5 billion bonds that were issued by 1MDB and co-guaranteed by IPIC.

These bonds, issued by Goldman Sachs in 2012, are at the very heart of 1MDB’s troubles with IPIC.

IPIC claims that it never received the US$3.5 billion worth of payments from 1MDB. The money was mostly consideration for IPIC’s undertaking to co-guarantee the bond issuance. Approximately US$1 billion of the payment was supposed to be for 1MDB to extinguish IPIC’s call options on 1MDB’s energy assets.

Conversely, 1MDB claims that the payments were made to an IPIC subsidiary — Aabar Investments PJS Ltd (BVI). IPIC claims the British Virgin Islands-registered company was never a subsidiary.

On top of that, IPIC also advanced US$1.2 billion to 1MDB in 2015. The money was for 1MDB to settle a US$975 million term loan from Deutsche Bank as well as an estimated US$200 million for interest payments on the Goldman Sachs-issued bonds as well.

As part of the settlement agreement, the finance ministry (MoF) has to undertake a guarantee for all of 1MDB’s future interest and principal payments for the US$3.5 billion bonds. This is a highly attractive arrangement for IPIC, absolving it of the heavy obligation.

Thus, IPIC is expected to keep the settlement agreement intact for now, and come to the negotiating table with 1MDB to discuss extensions. This could mean extensions that stretch beyond Aug 31, when the country will be celebrating 60 years of independence since 1957.

Being the sole shareholder of 1MDB, MoF will have to step in to settle the outstanding sum if the “technical matters” could not be resolved soon enough.