Thursday 28 Mar 2024
By
main news image

ON Sept 29, 2009, the local foreign exchange market was stirred by two unusually large transactions of US$700 million and US$300 million each. The money was remitted out of the country by Deutsche Bank Malaysia on behalf of its client — 1Malaysia Development Bhd (1MDB).

It was cash for 1MDB’s then highly touted joint venture with PetroSaudi Holdings (Caymans) Ltd, which was owned by a company incorporated in Saudi Arabia called PetroSaudi International Ltd .

1MDB put in US$1.0 billion (RM3.48 billion at the exchange rate then) for a 40% stake in the JV called 1MDB PetroSaudi Ltd, which was incorporated in the Cayman Islands.

The JV was called off six months later, but it has been five years and the US$1.0 billion plus an additional US$800 million has not come back to Malaysia.  It may never, despite the fact that newly minted 1MDB CEO Arul Kanda Kandasamy had said recently that it has made gains of US$488 million.

The Edge has spent months investigating the mystery of the initial US$1.0 billion and the subsequent US$800 million that went to PetroSaudi Holdings.

Here is a timeline of the twists and turns of the money trail and an explanation on what happened and why.

Sept 28, 2009
The initial equity investment of US$1.0 billion
1MDB and PetroSaudi Holdings (Cayman) Ltd signed a joint-venture agreement on Sept 28, 2009. 1MDB issued a press release on Sept 30 touting the US$2.5 billion JV as a new era of economic cooperation between Malaysia and Saudi Arabia.

The impression given was that PetroSaudi Holdings is a company owned by the government of the Kingdom of Saudi Arabia. It is not although one of its two shareholders is Prince Turki, one of the many sons of King Abdullah, who passed away recently. The main shareholder is a Saudi businessman, Tarek Obaid.

What was also not made clear at the time was that 1MDB’s JV partner was not putting any cash into the JV, and that PetroSaudi Holdings’ 60% equity was via an injection of assets valued at US$1.5 billion.

More important was the fact that it was NEVER DISCLOSED that from the US$1.0 billion that 1 MDB would put in, US$700 million was to be immediately used to pay a debt that was put into the JV company. In short, from the word go, the JV only had US$300 million left from the US$1.0 billion 1MDB had remitted on Sept 29, 2009.

The Edge has learnt that the JV company was incorporated on Sept 18, 2009, and seven days later on Sept 25, it had incurred a debt of US$700 million, being a sum owed to its JV partner PetroSaudi Holdings. The JV was signed on Sept 28 and on Sept 29, PetroSaudi Holdings wrote to the JV company to demand repayment of the US$700 million “loan”.

Why was there a need for PetroSaudi Holdings to provide the “ loan” a mere three days before the JV was signed, and a mere four days before US$1.0 billion was to be remitted by 1MDB?

What transaction was so urgent that required PetroSaudi Holdings to extend an interim loan to a JV company that had not even started operations?

Did the management and board of 1MDB verify that there was indeed a loan given by PetroSaudi Holdings to the JV company and cash was actually put in?  Did 1MDB’s lawyers – Wong & Partners – do a thorough check of the loan agreement that was signed on Sept 25?

As for the US$1.5 billion valuation given to the PetroSaudi Holdings assets, who did the valuation, and when? Did 1MDB do an independent valuation of its own? Did the board of 1MDB review and approve the valuation?

And why was it that when they announced the JV in 2009, 1MDB did not make it clear that PetroSaudi Holdings was not putting any cash into the JV?

March 31, 2010
From equity to a loan
After the big PR exercise in Malaysia about the JV, there was no further news about its progress until 1MDB’s first set of audited accounts for the full year to March 31, 2010, was submitted to the Companies Commission of Malaysia in October of that year.

To the shock of many people, it was disclosed in the accounts that the JV had been called off, and 1MDB’s 40% stake was sold for US$1.2 billion (original US$1.0 billion plus US$200 million gain)  to its partner on March 31, 2009 – the last day to close its audited accounts.

What was also interesting was that the external auditor that signed off the accounts was KPMG, and not Ernst & Young (EY), which was the appointed auditor.

The Edge has learnt that EY withdrew from the audit because it was unable to get a satisfactory explanation and gain access to information regarding the JV, especially about the US$700 million used to pay off the loan. EY’s attempt to contact the JV partner for information also came to nothing.

To avoid a situation where EY would have had to sign off the audit with a qualification, the accounting firm and 1MDB parted ways. (Auditors qualify accounts when they are unable to obtain audit evidence regarding particular account balances and/or class of transactions.)

The withdrawal of EY delayed the finalisation of the audited accounts. When it was completed, the US$1.2 billion was changed from equity capital to a loan to PetroSaudi Holdings in the form of Islamic Murabaha notes which guaranteed an 8.7% annual return.

Accountants say the reason for the change was because if the US$1.0 billion continued to be treated as equity in a JV, KPMG would have also insisted on seeing evidence of the money, how it was used and why the US$700 million debt was charged to the JV.

But as a loan to an external party, all that was needed was a copy of the loan agreement signed with PetroSaudi Holdings, and 1MDB’s auditor no longer needed to insist on seeing proof that the money was still controlled by the JV company.

In short, what was supposed to be equity money was turned into a loan in order for 1MDB’s accounts to be approved without any qualification.

2010
1MDB lends another US$800 million
Instead of being a JV partner, 1MDB became a lender that bankrolled PetroSaudi Holdings by subscribing to more Murabaha notes – US$500 million in 2010 and another US$300 million in May, 2011.

Why 1MDB became a lender of US$2.0 billion to PetroSaudi Holdings was something its management and board of directors have never explained. Certainly, its mandate was never to act as a lender of cash, especially since its own funds are all borrowed and at high costs.

Why didn’t 1MDB ask for its money back and part ways with PetroSaudi after the JV collapsed?

One can only surmise that it became a lender in order for its audited accounts for FY March 31, 2010, 2011 and 2012 to be approved without qualification and without having to show to KPMG that it was in control of the money.

June 1, 2012
Loan swapped for an asset
The money trail took two further twists in 2012.

On June 1, the US$2.0 billion loan was revalued at US$2.223 billion – another nice paper gain. But, yet again, 1MDB did not take back its cash.

Instead, it entered into an agreement to swap the US$2.223 billion loan into a 49% stake in PetroSaudi Oil Services Ltd.

Sept 12, 2012
Asset sold and money placed with Cayman SPC
Three months later, on Sept 12, 1MDB sold the PetroSaudi Oil Services Ltd stake to an unnamed “external party” for US$2.318 billion. Why the constant shuffling around?

It called off its initial JV after six months, and now this deal involving another PetroSaudi company was called off after three months. Such asset shuffling is how financial wheeler-dealers behave, but not what a company whose mandate is to spearhead catalytic economic transformation in Malaysia should be doing.

Yet again, 1MDB decided not to take the cash and remit it back to Malaysia even as it needed to borrow more back home and its debt servicing surged.

The US$2.318 billion was instead placed in various classes of participating shares in a Segregated Portfolio Company (SPC) registered in the Cayman Islands. What these “participating shares” were have never been disclosed by 1MDB. In fact, notes in its audited accounts of FY2013 showed that 1MDB’s board of directors admitted they had no control over how its money was being used and invested.

For an idea of the quality of the assets, Deloitte had classified them as Level 3 — the lowest of three levels of assets in the fair value accounting hierarchy. Indeed, it is not just the Cayman SPC assets but all of 1MDB’s RM13.9 billion of “investments held for sale” that were given Level 3 ranking.

The 1MDB accounts explain that “Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data”. In layman’s language, this means there is no openly and transparently obtainable verification of the fair value of the assets.

So, how was the fair value derived? We looked at the prospectus of the SPC, which is managed by Bridge Partners Investment Management (Cayman) Ltd and administered by Vistra Fund Services Asia Ltd, and discovered that the valuation can be done rather arbitrarily.

For example, the prospectus states that “in calculating the Net Asset Value, the Administrator may rely upon, and will not be responsible for the accuracy of, financial data furnished to it by third parties ...”.

It went on to say: “If and to the extent that the Investment Manager is responsible for or otherwise involved in the pricing of the Fund’s assets, the Administrator may accept, use and rely on such prices, without verification, in calculating the Net Asset Value and shall not be liable to the Fund, any shareholder or any other person in doing so.”

What this means is that the investment manager and administrator can agree between them the net asset value of the fund and this cannot be challenged by the shareholder of the SPC, which is 1MDB.

The FY2013 audited accounts were delayed by a year because KPMG declined to continue as auditors and was eventually replaced by Deloitte. Nonetheless, 1MDB continued to make “paper gains”. By Aug 1, 2014, the money in the Caymans had grown to US$2.33 billion (RM7.71 billion).

November/December 2014
Money redeemed but did not return home
Under intense scrutiny about the money in the Caymans, 1MDB announced that it had redeemed the US$2.33 billion (RM7.71 billion) in November and December 2014.

Arul Kanda is on record as saying that the December redemption of US$1.11 billion (RM3.98 billion) will not be brought back to Malaysia, but will be kept offshore in US dollars as a currency hedge because 1MDB had 6.5 billion of US dollar-denominated debt.

On the other hand, the first redemption of US$1.22 billion (RM4.03 billion) was “substantially utilised for debt interest payment, working capital and payment to Aabar as refundable deposits pursuant to a Settlement Agreement to extinguish the Options Agreement” (see “Did 1MDB pay Aabar US$1 bil to terminate options? ” above).

Yet again, instead of bringing the money back, 1MDB entered into another “transaction” to keep the money offshore – this time the Settlement Agreement to retire the Aabar options.

What can be surmised from the events of the last five years is that 1MDB kept entering into deftly structured transactions timed to avoid vigorous scrutiny by its external auditors about the money.

And although it claims to have made gains of US$488 million from the original sum of US$1.8 billion, it is not wrong for us to ask if it is just a case of being paper-rich,  but cash-poor — that is, are the figures mere accounting entries not fully backed by cash or liquid assets?

History has shown many times over what eventually happens to companies with such paper assets and profits.

 

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.

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.

      Print
      Text Size
      Share