This article first appeared in The Edge Financial Daily, on May 10, 2016.

KUALA LUMPUR: 1Malaysia Development Bhd (1MDB), which defaulted on a US$1.75 billion (RM7.04 billion) bond late last month, will have to make interest payment on a second US$1.75 billion bond it issued, which is due tomorrow.

The troubled state investment fund has not yet decided whether or not to pay, except to say that it is “exploring all options”.

The second bond carries a US$52.4 million interest payment, with a 5.99% coupon arranged by Goldman Sachs Group Inc in May 2012. The debt was issued by 1MDB Energy Ltd and proceeds were used to fund the purchase of power assets from Malaysian billionaire T Ananda Krishnan. So far, it hasn’t missed payments.

The second bond, together with the first issuance of US$1.75 billion by 1MDB Energy (Langat) Ltd with a 5.75% coupon rate maturing in 2022, were arranged by Goldman Sachs and co-guaranteed by Abu Dhabi’s International Petroleum Investment Co (IPIC).

IPIC has already made good on the interest payment that 1MDB missed under the first US$1.75 billion bond, announcing that it will pay bondholders of 1MDB after the fund failed to do so on April 25.

1MDB in a statement on April 26 said this had triggered a cross default on a RM5 billion sukuk due in 2039 and the RM2.4 billion Bandar Malaysia Sdn Bhd sukuk due between 2021 and 2024.

However, it stated that there was no cross default on the RM800 million loan from the Social Security Organisation.

This came amid a dispute between 1MDB and IPIC, as the latter claimed that it did not receive any money as a form of indemnity to guarantee the US$3.5 billion bonds issued by 1MDB.

However, 1MDB said it transferred US$3.5 billion to a British Virgin Islands-registered firm called Aabar Investments PJS Ltd (BVI), which IPIC clarified was not a unit of the sovereign wealth fund.

Subsequently, 1MDB indicated that it may have been a victim of fraud, with president and group executive director Arul Kanda Kandasamy saying that the disputing parties are currently working together to settle the disagreement.

To recap, IPIC in May last year entered into a binding term sheet with 1MDB, which entailed the latter providing US$1 billion to 1MDB for the settlement of liabilities, assuming obligations to pay interest due for US$3.5 billion of 1MDB bonds that it guaranteed and forgive an undisclosed amount of debt, in exchange for 1MDB’s assets.

In a statement yesterday, 1MDB said it had started an engagement process for its US dollar-denominated bondholders following the default on the first US$1.75 billion bond (Langat notes).

It has appointed Alvarez & Marsal Asia Ltd (A&M) as its financial advisor and DF King Ltd to directly carry out the bondholder identification and registration process.

“1MDB will now actively engage with all bondholders in order to outline the next steps of the process; explain the background of the dispute; clarify why 1MDB has taken the position to not make the interest payment on the Langat notes; and reiterate that 1MDB has a rationalisation plan in place that enables the company to meet its existing debt obligations,” it added.

The fund said DF King will be launching a microsite at http://sites.dfkingltd.com/1MDB, which will contain all relevant information and will include regular updates for bondholders.

“Once registered, registrants will be able to submit questions online through the website,” said 1MDB, adding that a call for all US dollar-denominated bondholders will take place on May 23.

According to its website, A&M is a multinational professional services firm with presence in multiple countries including Canada, China, India, the United States and the United Kingdom. The company offers performance improvement, turnaround management and business advisory services.

According to reports, A&M has advised various high-profile businesses such as global financial services firm Lehman Brothers Holdings Inc, which filed for bankruptcy in 2008, and Arthur Andersen LLP, the auditor for Enron Corp, which went bankrupt in 2001.

DF King, meanwhile, specialises in stakeholder engagement, with more than 1,000 clients over 32 countries, via its eight global offices. The group provides advisory and execution services for equity and debt transactions, and support in insolvency matters. Its notable clients include Australia’s Westpac Banking Corp and Bidgee Finance Ltd, UK-based Towergate Insurance, and Bank of America.

In a statement yesterday, S&P Global Ratings said in Malaysia, the 1MDB saga had dominated political discussions in the country for more than a year, most recently when it missed an interest payment on a bond it had issued.

“But what looms larger than the potential financial losses related to the company is the threat to Malaysian political stability — making the company an important development for the government’s credit standing,” it added.