KUALA LUMPUR (April 26): International Petroleum Investment Co (IPIC) will honour its obligation as a guarantor to pay the US$50.31 million (RM195.2 million) interest due to 1Malaysia Development Bhd’s (1MDB) bondholders, if the latter defaults.
But this may not necessarily be music to 1MDB management’s ears.
This is because IPIC also demands for indemnities that the Abu Dhabi’s sovereign wealth fund and its subsidiary Aabar Investment PJS are entitled to in return for the guarantee of the two tranches of US$1.75 billion bonds issued by 1MDB’s unit 1MDB Energy (Langat) Ltd.
The interest payment was due last Monday. But there is a five-working-day grace period before the default can be called. The sum must be paid by midnight yesterday, according to New York time, or noon today in accordance to Malaysian time. If 1MDB does not pay, the fund would be in default. As at press time, there was no official announcement on 1MDB’s payment.
IPIC announced to the London Stock Exchange yesterday that any payment in respect of the bonds would be made by IPIC in respect of its obligations under the Guarantee and not in any capacity under the terms of the binding term sheet, which is the debt-settlement agreement signed in June last year.
It also stressed in its latest announcement that 1MDB has to provide the indemnities although the binding term sheet had been terminated.
“IPIC notes that it is entitled to the benefit of indemnities from 1MDB and MoF (ministry of finance) in respect of all amounts that it may be required to pay in respect of the Notes and the Guarantee under the terms of the binding term sheet and these indemnities survive the termination of the binding term sheet,” the announcement read.
To recap, in 2012, IPIC co-guaranteed the two tranches of 10-year US$1.75 billion bonds. In June last year, IPIC and 1MDB entered into a debt-settlement agreement, which is the binding term sheet as mentioned in IPIC’s announcement.
Under the agreement, IPIC and its unit Aabar Investments assumed then-cash-strapped 1MDB’s obligation on interest payments of US$50.31 million that were due to the US$3.5 billion bond. On top of that, IPIC granted a US$1 billion loan upfront to 1MDB.
In return for the debt guarantee and loan assistance, 1MDB transferred US$855 million, US$933 million and US$295 million over two years since 2012 plus US$1.4 billion security deposit to a company registered in the British Virgin Islands called Aabar Investments PJS Ltd (Aabar BVI).
But IPIC two weeks ago said that Aabar BVI “was not an entity” within IPIC’s corporate group. Also, IPIC and its unit Aabar Investments did not receive any money transferred from 1MDB all this while.
However, 1MDB’s accounts show that it has transferred such sums to Aabar BVI, according to Public Accounts Committee’s report after the probe on the strategic investment fund.
In a nutshell, 1MDB has to provide US$3.5 billion indemnities to IPIC if it defaults in the interest payment and IPIC has to step in to make the payment.
Nonetheless,IPIC’s move may be within 1MDB’s expectation.
In an interview with The Edge weekly, 1MDB’s president Arul Kanda Kandasamy said that “If their (IPIC) guarantee is called, they will come after me under the back-to-back guarantee.
“I will dispute that, then we will fight and I will counter sue saying you have my US$3.5 billion. Then we will have to solve it. Best-case scenario, I get everything — US$6 billion, worst-case, I get zero.
Probably we will end up somewhere in the middle, which is better than nothing,” Arul Kanda said. (For more, please read the latest edition of The Edge weekly).
Meanwhile, Arul Kanda had also reiterated that 1MDB had sufficient cash to meet the interest payment. But 1MDB might not want to pay simply because it was in dispute with IPIC on the indemnities for the bond guarantee.