Bank Negara queries bank auditors on unpaid 1MDB loan

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KUALA LUMPUR: Bank Negara Malaysia (BNM) has queried the external auditors of lenders that extended a RM2 billion loan to 1Malaysia Development Bhd (1MDB) on how they will treat the unpaid loan in the upcoming full-year audited accounts of the financial institutions.

Sources said the feedback given to the central bank was that it is likely to be categorised as a non-performing loan (NPL), but there will not be any bottomline impact yet as the loan is secured against 1MDB’s power assets.

1MDB had failed to settle the loan, which was originally due on Nov 30, 2014, despite being given two one-month extensions for the facility. It had also missed the latest Jan 30, 2015, deadline to pay up.

“BNM was told that it would be classified as NPL but, for the moment, it would have no bottomline impact on the banks because the loans are secured by the power assets [among other things],” one source familiar with the matter said.

“There will be a bottomline impact only if the value of the security drops significantly or if something happens that prevents the banks from taking over the assets.”

Malayan Banking Bhd (Maybank) and RHB Capital Bhd (RHBCap) are the lead lenders, with 58.99% and 32.41% respectively of the RM2 billion loan. The other lenders are Alliance Investment Bank Bhd (4.06%), Malaysia Building Society Bhd (3.24%) and Hwang DBS Investment Bhd (1.29%).

All five are due to release their financial results for the quarter ended Dec 31, 2014, by end- February. With the exception of Alliance Investment Bank, it will be the lenders’ final quarter for the 2014 financial year.

Alliance Investment Bank’s parent company Alliance Holdings Bhd’s financial year-end is March 31, 2015. HwangDBS Investment is part of banking group Affin Holdings Bhd, following a merger that was completed last year.

The Edge weekly, in its latest issue dated Feb 2, reported that tycoon T Ananda Krishnan (AK), as the guarantor of 1MDB’s bank loan, could end up offering a RM2 billion interim loan to 1MDB to help it settle the RM2 billion debt.

1MDB bought from AK the assets, housed under Powertek Investment Holdings Sdn Bhd (PIH), in an RM8.5 billion deal back in 2012.

But until and unless there is certainty that such a loan from AK will indeed come through — it is understood that the terms are still being decided upon — the lenders are working on taking a legal position on the non-repayment, a source told The Edge Financial Daily.

“The lenders are planning to call for an event of default (EOD) on the loan, but they must first seek board consent to do this. The lenders are expected to revert on whether to officially declare it a default by Feb 18,” the source said.

“The lenders have been forced into a corner. If it’s not declared a default, they can’t crystallise the assets and force AK to make good on his guarantee. The lenders have already issued a letter to PIH to inform it that it is technically in default,” the source added.

It is understood that an EOD allows a lender to seize the collateral that has been pledged and sell it to recoup the loan. 

The RM2 billion loan is part of a RM5.5 billion debt 1MDB had taken through its subsidiary PIH last May to refinance a RM6.17 billion bridging loan taken in 2012 to part finance the purchase of the power assets. The remaining RM3.5 billion has been converted into a 10-year term loan due in August, 2024.

Two days ago, Moody’s Investors Service opined that there would not be any systemic threat to Malaysia’s banking system even if 1MDB defaults on its loan as local banks’ exposure to the state wealth fund is collateralised.

“We don’t rate 1MDB, so we don’t know if it is going to reform its debt or not. But if you look at the scale of its debt, it would not represent a systemic threat to the financial system. Firstly, we think the banks’ exposures are collateralised. So, if the worst-case scenario happens, the loss will be probably limited and they will take collateral,” Moody’s vice-president and senior credit officer for financial institutions Eugene Tarzimanov told The Edge Financial Daily on the sidelines of an event on Wednesday.

BNM governor Tan Sri Dr Zeti Akhtar Aziz on Jan 27 said the loan matter was something between the banks and 1MDB, while the central bank’s responsibility is to ensure that any default, if it happens, will not have a systemic impact on the banking system.

 

This article first appeared in The Edge Financial Daily, on February 6, 2015.