1MDB defaults if RM2 billion loan not paid by February 18, say bankers

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KUALA LUMPUR (Feb 11): Malaysian bankers will trigger an event of default (EOD) if state strategic investor 1Malaysia Development Bhd (1MDB) fails to repay RM2 billion loan for its power unit taken in May 2014, say sources.

The loan has been rolled over twice with the last deadline being last month and is part of a RM5.5 billion debt taken by a unit of the company wholly owned by the Finance Ministry.

The 1MDB subsidiary, Powertek Investment Holdings Sdn Bhd, took the loan last May to refinance a RM6.17 billion bridging loan taken in 2012 to part finance the purchase of power assets.

The remaining RM3.5 billion has been converted into a 10-year term loan due in August 2024.

"A line has been drawn in the sand and its February 18 or the EOD will be triggered," a source familiar with the matter told The Malaysian Insider.

Maybank has 58.99% of the RM2 billion loan while RHB has 32.41%. The other lenders are Alliance Investment Bank Bhd (4.06%), Malaysia Building Society Bhd (3.24%) and Hwang DBS Investment Bhd (1.29%).

Other sources have confirmed that a letter to that effect has been sent to 1MDB, which has been negotiating a loan with tycoon T. Ananda Krishnan to repay the debt.

It is not known if the media-shy billionaire has agreed to provide the loan. But critics say it is unprecedented for a government-owned firm to be indebted to a citizen.

EOD is an action or circumstance that causes a lender to demand full repayment of an outstanding balance sooner than it was originally due.

According to financial website Investopedia, a lender will usually include a contract provision covering events of default to protect itself in case it appears that the borrower will not be able to or does not intend to continue repaying the loan in the future.

An event of default enables the lender to seize any collateral that has been pledged and sell it to recoup the loan.

"Occurrences that may trigger an event of default include non-repayment of a loan at maturity, breach of contract and declaration of bankruptcy.

"Event of default clauses can be included not only in loan and lease agreements, but also in business agreements such as joint ventures and partnerships. Such a clause can allow the non-defaulting parties to exit a broken agreement," it said.

1MDB president and group executive director Arul Kanda Kandasamy told Singapore's Business Times over the weekend that the remaining US$1.103 billion (RM3.91 billion) Cayman Islands funds will not be repatriated back to Malaysia.

This has triggered demands for an inquiry by Malaysian opposition lawmakers, who fear 1MDB's failure to meet its debt commitments could be a big financial risk.

News agency Reuters reported on Saturday that 1MDB called off plans to sell up to RM8.4 billion (US$2.4 billion) of Islamic bonds.

The Islamic bond or sukuk had been earmarked to raise funds for the construction of a US$3.6 billion green field 2,000 Megawatt coal-fired power plant, known as 3B, in Negri Sembilan.

"It (the sukuk issue) has been called off... they are not moving ahead with the exercise anymore," a banker familiar with the deal said, requesting anonymity as he was not authorised to speak to the media.

If the sukuk issue had gone ahead in December, as earlier planned, it would have been the biggest Islamic bond deal of 2014.

1MDB, which owns 16 power and desalination plants in six countries, has been dogged by controversy over its nearly RM42 billion debt pile and criticised for a perceived lack of transparency.

The strategic investment company was also expected to withdraw from the 3B power project, another source familiar with fund's plans said, adding that an announcement would be made soon.

1MDB declined to comment on either its sukuk plans or the power project. A spokesman for Tenaga Nasional said the company was unaware of such reports.