Cabinet rejects RM3 billion for 1MDB as debt repayment options narrow

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KUALA LUMPUR (Feb 27): The Cabinet has rejected a proposed RM3 billion cash injection for the debt-laden 1Malaysia Development Bhd (1MDB), narrowing the financing options for the strategic investor to repay its debts on time.

The Malaysian Insider understands a majority of ministers at this week's Cabinet meeting on Wednesday did not approve the minutes of the previous week's meeting for the amount.

"The Cabinet rejected the proposed RM3 billion cash injection for 1MDB," a source told The Malaysian Insider in Kuala Lumpur last night.

Other sources confirmed the Cabinet rejection, which is seen as a blow to the wholly-owned government company that was set up in 2009 to invest in key economic sectors under Prime Minister Datuk Seri Najib Razak's rule.

"Options are narrowing for MoF as 1MDB cannot raise its own funds right now. It basically needs money from its only shareholder, the government," said another source.

Najib, who is also the finance minister, heads the advisory board of 1MDB, which has ventured into two huge property developments in Kuala Lumpur and owns 15 power and water plants across Asia.

Bad news for 1MDB

The Cabinet's rejection is another piece of bad news for 1MDB, days after Bloomberg said the company's bonds were trading like junk as investors sought greater clarity over its plans to wind down and sell off assets.

Bloomberg said investors were demanding a 441 basis-point premium over similar maturity Treasuries to hold the Kuala Lumpur-based company’s securities, compared with an average of 413 for speculative-grade quasi-sovereign notes in the region, a JPMorgan Chase & Co index shows. Its US$3 billion of 4.4% notes due in 2023 closed at 86.72 cents on the dollar on February 16, a record low.

1MDB had said last week it would not undertake any new investments after it sets up separate entities for property projects and raises cash from selling its power business.

It repaid a RM2 billion debt on February 13 with a loan from Malaysian tycoon T. Ananda Krishnan but that did not solve the problem for the firm, which has total debts of more than RM42 billion, an annual debt servicing of RM2.31 billion and also negative cash flow of RM2.25 billion in its financial year ended March 31, 2014.

Sources told The Edge Financial Daily early this week that the Ministry of Finance (MoF) was aware of 1MDB's cash-flow problem and knows it may have no choice but to step in with the RM3 billion injection.

But for that to happen, approval had to be given by the Cabinet, given the large amount of money involved and all the controversy that 1MDB has generated.

Treasury bills

Putrajaya had on February 11 and 12 raised RM2.1 billion through two treasury bill issues that money market dealers say were unusually large amounts.

Sources told The Edge Financial Daily that the MoF could be getting the money ready should it go ahead and come to the aid of 1MDB.

The cash injection will have to be done before 1MDB’s next financial year closes on March 31, 2015 – which is just five weeks away.

‎Despite concerns raised by so many parties, MoF officials have always insisted that 1MDB was financially healthy and that the government only had to put in RM1 million as initial capital because the company was strong enough to borrow to fund itself.

New 1MDB president Arul Kanda Kandasamy (pic, left), in a February 18 press release on its strategic review, said 1MDB would stop borrowing from now.

Massive debts

Sources say the truth is that 1MDB can no longer go to the market to borrow – whether through bank loans or bond issues.

"The size of its debt of RM42 billion, the massive negative cash flow it has experienced in the last two years plus its struggle to pay the RM2 billion, make it difficult for any bank to lend to them," says one banker.

"Bond investors will also shy away from any new debt it wants to issue."

1MDB recently called off a RM8.4 billion Islamic bond that it had planned to raise cash to finance the 3B power project. – February 27, 2015.

Bankers say it was cancelled because of lukewarm response. Sources say bankers have also taken note of the fact that 1MDB has had difficulties proceeding with its plan to float its power assets to raise cash.