This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

THAT a state-owned fund like 1Malaysia Development Bhd (1MDB) should scurry to pare down some RM42 billion of debt ought to be unsettling. That its power assets, parked under Edra Global Energy Bhd, are not short of suitors should be a relief.

This is because these power assets are expected to fetch at least RM8 billion to go towards reducing 1MDB’s borrowings that, ironically, were partly used to buy those very same assets and other investments and fund units in the first place.

If 1MDB’s latest borrowing figures are not too far from the 19-month-old RM42 billion debt as at March 31, 2014, its borrowings should be at least halved with the proceeds from selling Edra, plus the RM16 billion worth of debt 1MDB is negotiating to offload to Abu Dhabi’s International Petroleum Investment Co (IPIC), together with an unspecified basket of assets.

Should Edra’s assets fetch as much as RM18 billion — a figure opposition leaders and analysts think as too lofty a price based on available information — 1MDB’s borrowings could fall by 80%.

However remarkable that sounds, one should not pop the champagne just yet.

For one, the latest asset and debt figures for 1MDB are not known and it secured a six-month extension to submit its accounts for the year ended March 31, 2015 (FY2015), due on Sept 30, on the grounds that investigators have the documents needed to complete the financial audit. Accounts for FY2015 for Edra and 1MDB Real Estate Sdn Bhd, were also unavailable.

Secondly, we have no idea what assets 1MDB is giving to IPIC for taking over RM16 billion of its debt. Only by knowing that can the general and investing public gauge what assets 1MDB has left to service its remaining debt obligations.

Yet Edra cannot be seen to be sold for too much money — especially if the buyer is public-listed national utility company a, Tenaga Nasional Bhd (TNB).

TNB is among three bidders for Edra’s power assets in Malaysia, Bangladesh, Egypt, Pakistan and the United Arab Emirates, with a net power generation capacity of 5,594mw (2,482mw or 44% overseas).

What we know is, 1MDB spent over RM12 billion to acquire Edra’s power assets from 2012 to 2014, including a premium of RM3.3 billion above fair value. This sum includes the RM2.38 billion it paid for Genting Sanyen and RM1.23 billion for a 75% stake in Jimah Energy Ventures Sdn Bhd from the Negeri Sembilan royal family.

Chris Eng, Etiqa Insurance and Takaful Bhd head of research, says he expects Edra’s assets to fetch between RM16 billion and RM18 billion, including debts to be inherited. Anything more, he adds, would be “tantamount to overpaying”.

Deputy Minister of Finance Datuk Johari Abdul Ghani told reporters that Edra’s assets are worth between RM15 billion and RM20 billion.

But analysts called a price tag of over 21 times trailing earnings “lofty”.

“Assuming TNB pays RM16 billion to RM18 billion, the equity dilution is RM6 billion to RM8 billion,” says UOB Kay Hian, which estimates Edra’s discounted cash flow to be RM10 billion and sees the replacement cost for Edra’s power plants at RM17.3 billion.

Similarly, Affin Hwang Research, in an Oct 16 note, said buyers should not “pay more than RM8.7 billion [RM12 billion price tag less RM3.3 billion goodwill] to acquire these assets since their power purchase agreements [PPAs] are now slightly shorter”.

Opposition lawmakers demanded in Parliament last week that TNB does not pay more than RM8 billion for Edra’s assets. Rafizi Ramli, Member of Parliament for Pandan, argues that some of Edra’s power plants are old while others have concessions which are lapsing soon.

Currently, the majority of Edra’s PPAs will expire in less than 10 years. The PPAs for the 440mw Teluk Gong 1 PS (Powertek) and 330mw  Tanjung Kling PS (Pahlawan) power plant will expire in January 2016 and 2020 respectively.

An extension of power purchase agreement (PPA) tenures should boost Edra’s valuations but Etiqa’s Eng says it is premature to speak of renewals. “If you are a peaking plant, renewals should not be an issue. But, the country should see a high reserve margin or excess capacity coming on board in the next year or so. While PPAs can be extended, the question at the time of renewal is whether the plants are efficient and whether the country needs them.”

At this point, it is still unknown if the Edra bids meet the government’s expectations. TNB is believed to value Edra at just over RM8 billion to RM13 billon and has said it will not overpay. Indeed, TNB bought a 70% stake in Jimah East for RM47 million, significantly lower than 1MDB’s actual development cost of RM84 million. And word on the street is that TNB submitted the lowest bid for Edra, while having the advantage of being the only bidder that can purchase all the power assets without being hampered by regulatory restrictions, such as a 50% cap on foreign shareholding for power plants here.  Meanwhile, the other two bidding parties, believed to be Saudi Arabia’s Aljomaih Group and China’s General Nuclear Power Corp Ltd,  are said to have submitted a joint bid below RM10 billion.

If Edra fetches only RM8 billion, 1MDB could still have some RM18 billion worth of debt to deal with after IPIC takes over RM16 billion worth of debt. Would 1MDB have enough assets left to justify its existence? Or would 1MDB be better off being wound down, given the controversies surrounding it?

Other than its power assets, 1MDB has 234 acres of encumbered land in Air Itam, Penang, for which it paid RM1.38 billion, and a 310-acre tract in Pulau Indah, Selangor, that it bought for RM294.38 million from Tadmax Resources Bhd. Its jewel in the crown would be the 70-acre Tun Razak Exchange (TRX) land in Kuala Lumpur , and the 486-acre Bandar Malaysia land slated for mixed development, including affordable urban housing. But much of the cash from the Bandar Malaysia and TRX land and development deals that have been announced should go towards building infrastructure for these developments. Already, loans have been taken to cover relocation costs of the old Sungai Besi airbase.

Whether 1MDB would need to further tap national resources, beyond the 10-year tax holiday it reportedly gained, to execute its role as master developer of TRX and Bandar Malayia, could well depend on how well negotiations go with IPIC and the potential buyer for Edra.

For now, there is still no telling at what cost the government’s promise to resolve all issues surrounding 1MDB by year-end will come. But real closure on 1MDB is necessary for Malaysia to win back the goodwill lost from the controversy.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.