Govt mulls equity swap for KWAP, Tabung Haji’s 1MDB bonds

This article first appeared in The Edge Financial Daily, on April 22, 2019.
-A +A

KUALA LUMPUR: 1Malaysia Development Bhd’s (1MDB) debt woes are far from over as far as Malaysians are concerned. The controversial state investment fund’s whopping debts of over RM30 billion, some of which are government-guaranteed bonds that the new government has inherited, are straining the nation’s coffer at a time when public expenditure is needed to stimulate economic growth.

It is learned that to reduce 1MDB’s debt burden, no thanks to the Barisan Nasional administration, the new government is proposing that the RM2.4 billion bonds held by Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and Lembaga Tabung Haji currently be converted into equity stakes in the Bandar Malaysia project.

A large bulk of 1MDB’s bonds,  amounting RM24 billion, are believed to be held by foreign investors. The issuance of these debt papers, which amounted to US$6.5 billion, was advised by Goldman Sach.

“The value of the 1MDB debt papers to be converted is roughly RM3 billion ... these are the bonds held by KWAP and Tabung Haji,” said a source familiar with the matter.

“As a result, after the conversion, the two (KWAP and Tabung Haji) will end up being among the stakeholders of Bandar Malaysia,” the source added.

The RM2.4 billion sukuk held by the two institutions will be redeemed for RM3 billion under the terms, according to the source.

It is not known what the conversion ratio conveyed to the two institutions is. The Islamic sukuk was issued in February 2014 to raise funds for the development of Bandar Malaysia. The debt papers were issued in two tranches, which generate yields of 5.85% and 6.05%, for seven and 10 years, respectively.

Another source said this debt-to-equity swap plan is one of the proposals on the table. KWAP, Tabung Haji, and TRX City Sdn Bhd, which owns the Bandar Malaysia project, could not be reached for comment yesterday.

According to a schedule of interest and principal payment for 1MDB debts released by the ministry of finance, between March and May last year, the ministry paid RM1.265 billion worth of interest payments on behalf of 1MDB.

On top of that, another RM810.2 million interest payment was due in the three months between September and November last year. In total, RM2 billion was needed to service 1MDB debts and that did not include any principal payments.

Similar interest payments are expected for this year and following ones if the debts are not restructured.

KWAP has subscribed to RM1.4 billion worth of 1MDB sukuk. On top of that, the civil servant pension fund has extended RM4 billion loans to SRC International Sdn Bhd, a former 1MDB subsidiary, for the purchase of a mining company in Mongolia. Former prime minister Datuk Seri Najib Razak is currently facing a trial related to the misappropriation of funds in SRC International.

Tabung Haji has been reported to be holding some RM920 million bonds in 1MDB’s real estate development Bandar Malaysia. The pilgrims’ fund also bought 0.63ha of land in Tun Razak Exchange from 1MDB.

Last Friday, the government announced it had decided to sell the 60% equity stake in the Bandar Malaysia project to IWH-CREC Sdn Bhd for RM7.41 billion in a deal which the buyer agreed to advance a payment of RM1.24 billion within two months. The remaining 40% is currently held by TRX City.

IWH-CREC is a 60:40 joint venture between Iskandar Waterfront Holdings Sdn Bhd (IWH) and state-owned China Railway Engineering Corp (M) Sdn Bhd (CREC). Businessman Tan Sri Lim Kang Hoo holds a 63% stake in IWH, while Kumpulan Prasarana Rakyat Johor Sdn Bhd owns the remaining 37%.

1MDB previously raised funds for the massive Bandar Malaysia development that covers 583.37 acres (236ha) of land at the former air force base near Sungai Besi.

According to the Auditor General’s (A-G) Report that was declassified after the change of government, the project’s land acquisition and development, including the relocation of the Sungai Besi air force base, cost about RM3.095 billion, of which RM1.117 billion was paid by the government, while the balance RM1.6 billion was to be borne by 1MDB.

However, 1MDB rerouted RM288 million of the government’s payment to settle its debt interest commitments. Meanwhile, the air force base relocation that was scheduled to be completed by end-2016 was delayed as the contractor was owed RM396.42 million up to September 2015.

The A-G’s report also stated that half of the RM3.75 billion raised from loans and sukuk to fund the air force base relocation and the development of Bandar Malaysia had isntead been advanced to 1MDB. In short, the money raised was not used for its intended purposes.