Friday 29 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily, on April 28, 2016.

 

KUALA LUMPUR: Moody’s Investors Service said 1Malaysia Development Bhd’s (1MDB) failure to pay a US$50.3 million (RM197 million) interest payment raises the likelihood that contingent liabilities will crystallise on the nation’s balance sheet.

“The default increases the probability that contingent liabilities, particularly through cross defaults and an associated indemnity, will crystallise on Malaysia’s government balance sheet, a credit negative for the sovereign,” it said.

The global rating agency said that although recent developments have increased the likelihood of the government expending fiscal resources to pay the indemnity to Abu Dhabi sovereign fund International Petroleum Investment Co (IPIC), the risk remains contingent.

“The potential costs should therefore be added to the government’s stock of explicitly guaranteed debt, which amounted to 15.4% of gross domestic product (GDP) as of end-2015, up from 12.8% in 2011.

“Indeed, the contingent risks associated with 1MDB’s non-guaranteed liabilities may be as high or even higher than the government’s actual explicitly guaranteed exposures,” Moody’s said in a note yesterday.

Moreover, said the agency, the inability to rein in these off-budget risks stands in contrast to the on-budget improvements to the government’s fiscal position. Moody’s said 1MDB’s overall debt, according to latest publicly available data, which date back to 2014, is around RM42 billion, or less than 4% of GDP.

However, this figure does not incorporate the progress made by 1MDB over the past year in paring down its debts through various asset sales. As such, Moody’s assumes 1MDB’s total current liabilities to be much smaller. Malaysia is currently rated A3 with a stable outlook by Moody’s.

Moody’s note comes in the wake of 1MDB’s failure to service a coupon payment on a bond issued by subsidiary 1MDB Energy (Langat) Ltd on Monday. The US$1.75 billion 5.75% notes are due to mature in October 2022.

The failure to service the coupon payment triggered a default that has prompted a call on a guarantee by IPIC (Aa2 review for downgrade). IPIC will ultimately backstop holders of the notes, who will not have recourse to the Malaysian government, said Moody’s. However, the failure to pay on the part of 1MDB also triggered a cross default on other instruments guaranteed by the Malaysian government.

At the same time, under a bilateral agreement, 1MDB and Malaysia’s ministry of finance (MoF) had pledged to indemnify IPIC with respect to any payments related to the guarantee, as well as other disbursements.

“We estimate the total size of these contingent liabilities associated with 1MDB’s recent default to be around 2.5% of GDP,” said Moody’s.

The rating agency pointed out that although the credit risks related to the ongoing coupon payments and principal payment at maturity for the 1MDB Langat bond are borne by the guarantor, IPIC, the guarantees do not absolve 1MDB of this liability.

“While we understand that there is no direct recourse to the Malaysian government under the terms and conditions of the 1MDB Langat bond, in a filing with the London Stock Exchange on Monday, IPIC cites an indemnity that obliges both 1MDB and Malaysia’s MoF to effectively reimburse IPIC for any costs incurred in honouring the guarantee.

“Moreover, the indemnity covers a separate guarantee on US$1.75 billion 5.99% notes issued by 1MDB Energy Ltd (unrated), as well as other payments which are currently in dispute between 1MDB and IPIC. We estimate that the amounts that IPIC are claiming under the indemnity could be as much as US$6 billion, or around 2% of GDP,” it added.

On Tuesday, 1MDB announced that a cross default had been triggered on RM5 billion 5.75% sukuk due in 2039 (1MDB sukuk) and the RM2.4 billion 0.35% sukuk issued by Bandar Malaysia Sdn Bhd (unrated) due between 2021 and 2024.

In addition, 1MDB said there is a “material adverse effect” clause that may be triggered on a RM800 million loan from the Social Security Organisation (Socso)

As there are explicit government guarantees on both the 1MDB sukuk and Socso loan, the cross default increases the probability that the government will have to assume debt servicing obligations related to these 1MDB liabilities.

“The RM5.8 billion in explicit guarantees amount to about 0.5% of GDP,” Moody’s noted.

      Print
      Text Size
      Share