MoF cash injection for 1MDB?

fd_23Feb2015_theedgemarkets

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KUALA LUMPUR: 1Malaysia Development Bhd (1MDB) was not only helped by Ananda Krishnan to settle its RM2 billion debt to banks, but it may also require a cash injection of as much as RM3 billion from its owner — the Ministry of Finance (MoF).

Sources said that the controversial debt-laden outfit is facing a cash crunch as income from its power assets is not enough for debt servicing and that it has run out of borrowing options, as shown by it having to turn to a businessman for help.

Ananda provided a 15-month RM2 billion loan to enable 1MDB to settle its loan with a consortium of local banks on Feb 13. Sources familiar with the matter confirmed this with The Edge Financial Daily while expressing their surprise that 1MDB chief executive officer Arul Kanda Kandasamy had dismissed media reports about the loan from Ananda as mere speculation.

Arul had announced on Feb 13 that 1MDB had settled the RM2 billion owed to the consortium led by Malayan Banking Bhd and RHB Bank Bhd which had been first due on Nov 30, 2014. The loan was settled in time to prevent the banks from declaring a default.

Arul did not explain how 1MDB had raised the money in his Feb 13 statement, but in an interview with Mingguan Malaysia two days later, he said reports that Ananda had lent 1MDB the money were pure speculation. “Ananda has never said anything about this matter. This is speculation by third parties,” Mingguan Malaysia had quoted him as saying.

“I don’t know how he (Arul) can claim that (AK [Ananda] did not help),” says a source. “It was a simple, clean loan (with no conditions) as AK did not want to be seen as taking advantage (by setting tough conditions).”

In a reply to questions by The Edge on why he had not just come out and disclosed where and how 1MDB had raised the money, Arul said: “The facts on the (settlement of the) loan will be revealed in the appropriate forum/time that is our next set of accounts. To demand any different is to set a different standard for 1MDB which is not only unfair, but also ignoring our right and that of our stakeholders to legal and commercial confidentiality”

Paying off the RM2 billion debt does not solve 1MDB’s problem, which has total debts of over RM42 billion and an annual debt servicing of RM2.31 billion, and a negative cash flow of RM2.25 billion in its financial year ended March 31, 2014.

Sources say that the MoF is aware of 1MDB’s cash flow problem and knows it may have no choice but to step in with a RM3 billion injection. But in order for that to happen, approval has to be given by the Cabinet given the large amount of money involved and all the controversy that 1MDB has generated.

The government had on Feb 11 and 12 raised RM2.1 billion through two treasury bill issues that money market dealers say were unusually large amounts. Sources said the MoF could be getting the money ready should it go ahead and come to the aid of 1MDB.

The cash injection will have to be done before 1MDB’s next financial year close on March 31, 2015 — which is just five weeks away.

Despite concerns raised by so many parties, the MoF officials have always insisted that 1MDB is  financially healthy and that the government only had to put in RM1 million as initial capital because the company was strong enough to borrow to fund itself.

Arul, in a Feb 18 press release on its strategic review, said 1MDB will stop borrowing from now. 

Sources said the truth is that 1MDB can no longer go to the market to borrow — whether through bank loans or bond issues.

“The size of its debt of RM42 billion, the massive negative cash flow it has experienced in the last two years plus its struggle to pay the RM2 billion makes it difficult for any banks to lend to them,” said one banker. “Bond investors will also shy away from any new debt it wants to issue.”

1MDB recently called off a RM8.4 billion Islamic bond that it had planned to raise cash to finance its 3B power project. Bankers say it was cancelled because of lukewarm response. Sources said bankers have also taken note of the fact that 1MDB has had difficulties proceeding with its plan to float its power assets to raise cash.

 

This article first appeared in The Edge Financial Daily, on February 23, 2015.