ABU DHABI-based International Petroleum Investment Co (IPIC) and its subsidiary Aabar Investments have helped 1Malaysia Development Bhd out of a tight spot by agreeing to pay US$1.0 billion to settle the US$975 million loan and interest owed to a consortium of banks led by Deutsche Bank.
But the question is, what will 1MDB give IPIC and Aabar in return, and at what cost?
From Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah’s statement last Friday, it is clear that the payment by IPIC and Aabar is not a loan. Instead, it is part of a larger agreement between the two parties that, Husni says, will “include further measures to comprehensively address the various financial asset and liability transactions between the parties, further details of which will be announced in due course”.
In sum, the ministry is aiming to pare some RM16 billion from 1MDB’s RM42 billion debt as part of the exercise.
The statement does not say anything about the consideration 1MDB might give IPIC and Aabar. But sources point to the units from its BSI Singapore account, supposedly valued at US$1.103 billion, that have been the centre of controversy of late. However, the units might be worth much less than their book value.
The fact that 1MDB needs IPIC and Aabar to provide cash in exchange for the units suggests either that the units are not liquid or that they are worth less than their book value. After all, if 1MDB is able to monetise the units at the value it claims they are worth, it shouldn’t have a problem in paying off the US$975 million loan in the first place.
The Deutsche Bank-led consortium does not seem to think highly of the units either. The BSI Singapore account was supposed to have US$1.103 billion in cash as security for the US$975 million loan. Upon learning that the account held units instead of cash, however, it is understood that the consortium wanted an early settlement of the loan and interest.
Note that the financing exercise led by Deutsche Bank and syndicated to five Middle Eastern banks, including Abu Dhabi Commercial Bank, is guaranteed by the government.
Little is known about the units other than that they are owned by 1MDB’s Hong Kong-registered unit, Brazen Sky, and invested by an obscure company, Bridge Partners Investment Management Ltd, in several open-ended funds.
Furthermore, 1MDB needs the cash in a hurry and does not have many other options to get it. Under the circumstances, what are the odds that IPIC and Aabar are willing to value the units at their face value?
On the basis that 1MDB will have to let go of the units at a discount, the state-controlled fund is likely to have to “top up” the units with some other assets. One possible source of funds is the RM4.25 billion that 1MDB has deposited with IPIC as security for co-guaranteeing some US$3.5 billion of bonds issued by Goldman Sachs.
If 1MDB plans to tap this cash, however, it may have to release IPIC as the guarantor of the bonds. To do this, it would also have to refinance its US$3.5 billion bonds. Otherwise, 1MDB might opt to use some US$13.38 billion of the available-for-sale assets it is keeping in its books. Like the Brazen Sky units, however, there is doubt that 1MDB can monetise these assets at their book value.
At the end of this convoluted exercise, 1MDB will be able to pare its borrowings, although it would also have to take a haircut on the US$1.103 billion book value of its Brazen Sky units.
But what would 1MDB have really achieved from all the loans and clever financing exercises? It had borrowed the US$975 million from the Deutsche Bank-led consortium to pay IPIC and Aabar in the first place — to extinguish the IPIC and Aabar options. Now, it is getting money from IPIC and Aabar to pay back the loan, with interest.
Recall that the 10-year options given to IPIC and Aabar as part of the consideration for co-guaranteeing the Goldman Sachs bonds would have entitled Aabar to subscribe for up to 49% of any future listing of 1MDB’s power assets.
Furthermore, 1MDB has parked a substantial amount of cash with IPIC — RM4.25 billion (US$1.2 billion) in deposits given along with the options to guarantee the Goldman Sachs bonds.
Moving forward, it remains to be seen how 1MDB will pare the rest of its debt but one thing is certain — the fund is not creating value through these exercises.
The Edge says: IPIC/Aabar are only returning the US$1.0 billion they took from 1MDB last year, nothing more
The only thing that was significant about Friday’s three-paragraph statement by Minister of Finance 2 Datuk Husni Hanadziah was that 1MDB can breathe a big sigh of relief that it will not default on a US$975 million (RM3.6 billion) loan that is due end-August — an event that would have a disastrous effect on the country.
This was made possible because the Abu Dhabi-based International Petroleum Investment Corp (IPIC) and its subsidiary Aabar Investments had agreed to make a payment of US$1.0 billion on or before June 4 to 1MDB to be used to settle a Deutsche Bank-led international syndicated loan of US$975 million taken on Sept 1, 2014.
Should we say thank you, thank you to IPIC and Aabar?
Absolutely no. This is because IPIC/Aabar are only returning what they took from 1MDB.
Here is why we say that.
Last Sept 1, 1 MDB took the US$975 million loan to pay IPIC/Aabar US$1.0 billion to terminate an options that 1MDB had given them to subscribe for up to 49% of the future listing of the power assets owned by 1MDB, a prospect that is now very bleak.
That Deutsche Bank loan was secured against what was initially said by 1MDB and Prime Minister Datuk Seri Najib Tun Razak to be US$1.103 billion cash in the Swiss private bank BSI branch in Singapore. It is now revealed that the account had no cash but only unexplained paper assets said to be worth US$1.103 billion.
Whether the mix-up was caused by a deliberate attempt to mislead or a genuine misunderstanding is now the subject of a raging debate and investigation.
What Husni announced last Friday was simply that IPIC/Aabar was returning what it took from 1MDB last year. What he did not disclose, and which we have since found out (read story above), was that for getting the cash back, 1MDB is handing over the US$1.103 billion assets in the BSI account to IPIC/Aabar.
This, in effect, means there is no net gain for 1MDB from the swap.
Indeed, we understand that the transaction is subject to a revaluation of the assets in the BSI account and that 1MDB may even have given IPIC/Aabar a put option whereby 1MDB has to buy back those assets at a pre-determined price and at a pre-determined time.
It really will not surprise us if there is such an agreement as the track record of their dealings show this to be something that the two sides do.
The whole problem over the Deutsche Bank loan was caused by the options that 1MDB gave to IPIC/Aabar in 2012 to subscribe for up to 49% of the future listing of its power assets.
This was because IPIC had co-guaranteed two bonds totalling US$3.5 billion that was issued by 1MDB to finance the acquisition of power assets from Tanjong and the Genting Group.
In return for the co-guarantee, IPIC got to keep RM4.25 billion from the net proceeds of RM9.3 billion as refundable security and was also given the options.
Given the opaqueness of everything it does, we would like to ask Husni and 1MDB’s CEO Arul Kanda Kandasamy these questions:
Does the payment of US$1.0 billion that IPIC/Aabar will make on June 4 to 1MDB come with the following conditions:
1. 1MDB has to hand over the assets in the BSI account in Singapore to IPIC/Aabar?
2. IPIC/Aabar have the option to sell these assets back to 1MDB or the Ministry of Finance or other government entities at a pre-determined valuation and pre-determined time?
3. Is there an interest cost to the US$1.0 billion that 1MDB has to pay?
4.And by the way, what is the status of the RM4.25 billion of 1MDB’s money that IPIC has kept since 2012? Shouldn’t 1MDB get it back since the options have been terminated?
Husni and Arul, in the name of transparency and good governance, please answer these questions.
This article first appeared in The Edge Malaysia Weekly, on June 1 - 7, 2015.