IPIC demands US$1.1b back from 1MDB

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This article first appeared in The Edge Financial Daily, on April 19, 2016.


Flashback-April18-2016_FD_19apr16_theedgemarketsKUALA LUMPUR: The International Petroleum Investment Co (IPIC), which had nixed a debt-swap agreement with 1Malaysia Development Bhd (1MDB) yesterday, is demanding that 1MDB should pay back US$1.1 billion owed to it.

Yesterday, IPIC announced to the London Stock Exchange that 1MDB and Malaysia’s Minister of Finance (Inc) (MoF [Inc]) had “failed to perform certain payment and other obligations owed by them to the IPIC group” pursuant to the debt-swap agreement that the parties signed in June last year.

The payments include 1MDB’s obligation to pay IPIC US$1.103 billion, including interest, the statement read.

IPIC said both 1MDB and MoF (Inc) had defaulted on the debt-swap agreement signed with 1PIC and its unit Aabar Investments PJS, raising concerns that it could trigger a cross default on other 1MDB bonds guaranteed by IPIC.

“As a result, 1MDB and MoF [Inc] are in default pursuant to the terms of the binding term sheet (debt-swap deal), and IPIC’s and Aabar’s obligations under the binding term sheet have terminated,” said the United Arab Emirates’ sovereign fund.

“1MDB and MoF [Inc] continue to be bound by their respective obligations under the terms of the binding term sheet, including their continued indemnification of IPIC and Aabar for any non-performance under the binding term sheet and in relation to the guarantees entered into by IPIC, in respect of certain 1MDB group bond issues,” it said.

IPIC said following the default, IPIC and Aabar have engaged with and offered opportunities to both 1MDB and MoF (Inc) to settle the debts without success.

“IPIC and Aabar have now reserved all of their rights under the binding term sheet and are considering their options in relation to this dispute, including referring the matter to the appropriate dispute resolution forum,” the statement read.

In response to IPIC’s claim that 1MDB has failed to meet its debt obligation, the strategic investment fund asserted that it will meet all of its obligations under “any other financing arrangements”. And it reiterated that it has “ample liquidity” to do so.

Interestingly, 1MDB, meanwhile, pointed out that IPIC had failed to pay the semi-annual 5.75% interest payment, amounting to some US$100 million, attached to one tranche of the US$3.5 billion bonds, which was due yesterday.

1MDB had also said in a separate statement that it had paid off a US$150 million term financing facility from Export-Import Bank (Exim Bank) yesterday, saying it has now fully repaid all its bank and short-term debts.

1MDB also said yesterday in another statement that it had settled a RM2 billion facility from Marstan Investments NV ahead of the repayment date. The facility was arranged for 1MDB by Tanjong Public Ltd Co, which is controlled by tycoon T Ananda Krishnan.

To recap, IPIC and its unit Aabar entered into a debt-swap agreement on May 28, 2015, after 1MDB realised it needed help to settle the debts it had assumed to buy its power assets, which are now sold to China General Nuclear Power Corp, plus other purposes.

1MDB had raised bonds worth US$3.5 billion via Goldman Sachs.

It had also raised RM6.17 billion through a bridging loan from local banks and had taken a US$975 million syndicated term loan from Deutsche Bank to fund the purchase of 13 power assets that spanned five countries, including Malaysia, Egypt and Bangladesh.

Under the debt-swap agreement, IPIC had provided 1MDB US$1 billion to settle certain debts, which could have been used to pay off the US$975 million loan taken by 1MDB from Deutsche Bank.

IPIC had also agreed to pay all interest due under the IPIC-guaranteed 1MDB bonds amounting to US$3.5 billion and to take over liabilities for payment obligations under the bonds.

Further, IPIC had agreed to “forgive” certain financial obligations of the 1MDB group to the IPIC group. In return, 1MDB is obliged to transfer assets amounting to the US$1 billion, interest and liabilities accrued under the US$3.5 billion bonds and the debts that IPIC had agreed to forego by June 30 this year.

In exchange of IPIC agreeing to guarantee the US$3.5 billion worth of bonds raised by 1MDB, the latter was obliged to make collateral payments to IPIC’s subsidiary Aabar.

1MDB contends that it had made the collateral payments — US$855 million, US$933 million and US$295 million as security deposits and other guarantees — between 2012 and 2014 as well as a US$1.4 billion security deposit to an entity called Aabar Investments PJS registered in the British Virgin Islands (Aabar BVI).

However, 1MDB recently said it may have been a victim of fraud, following IPIC’s and Aabar’s denial that they received the payments and that Aabar BVI had been wound up in June 2015 as well as the Swiss Attorney-General’s statements that two officials linked to an Abu Dhabi state fund and a movie company had benefited from the payments.