GOVERNMENT-LED agencies don't often operate the way 1Malaysia Development Bhd (1MDB) does. It has a tendency to raise money in advance to invest in high-impact projects that have yet to be firmed up.
It did this in 2009 when it issued RM5 billion worth of government-guaranteed Islamic debt paper to establish a RM11 billion sovereign fund to undertake investments with parties from the Arab world that would create a big impact on the Malaysian economy.
Then, 1MDB was known as Terengganu Investment Authority (TIA) and had as its adviser Low Taek Jho, who hogged the limelight for organising high-profile events in Penang in the run-up to the general election. To supplement the RM5 billion raised, the state was to securitise its annual oil royalty revenue to raise a further RM6 billion to make TIA a RM11 billion super fund.
However the Terengganu state government did not want to participate in the proposed TIA and 1MDB was then left with the RM5 billion, which it subsequently invested in a joint venture with PetroSaudi International Ltd in 2010.
It is now well documented that less than six months into the investment with PSI, the Malaysian fund opted to convert the equity in the joint venture into debt. The investment, which started with a sum of US$1 billion (RM3.49 billion), became a debt owed to 1MDB to the tune of RM4.139 billion.
As at the end of March 31, 2012, the debt, in the form if Islamic bonds, had ballooned to RM6.8 billion as there were further issuances of PSI bonds that 1MDB subscribed to.
In June last year, the debts were redeemed through a debt-to-equity swap arrangement whereby 1MDB ended up with substantial control of PetroSaudi Oil Services Ltd (PSOSL).
In September, the equity in PSOSL was sold to an undisclosed buyer and the proceeds – US$2.318 billion in total – was put into a fund registered in the Cayman Islands.
For this, 1MDB has come under fire from the opposition.
The fund, in its defence, had said that the money was "safe” and would be used for strategic investments for sustainable returns.
It went on to add that the notion that these monies were put in Cayman Islands companies and will vanish is based on a lie perpetuated by some quarters and was completely absurd.
It backs its argument by stating that its books are audited by a well-established accounting firm.
But the question which 1MDB has not responded to so far is, why hasn't the money been brought back to Malaysia where its main investments are?
Why is there a need to put the money in the Cayman Islands?
While the PSI investment has yet to be settled, 1MDB raised another US$3 billion to be used for a joint venture with an Abu Dhabi entity through a government-to-government collaboration.
The US$3 billion debt paper was raised without much fanfare, unlike most other international debt paper. Its pricing and off-takers are not known.
Under conventional methods, the issuers of debt paper tend to launch, market and distribute the bonds as widely as possible to ensure optimum price discovery. Placing out the debt paper through the hands of a few through a private placement exercises is not normally done because it would not attract a broad base of investors.
In bond issues, the wider the distribution, the tighter the spreads tend to be, meaning lower cost for the issues.
Previously, 1MDB raised US$1.75 billion in debt paper purportedly at 425 basis points (bps) above the 10-year US treasuries and a few weeks later, the paper was offered to insurance companies at 200 bps.
If this is true, 1MDB has effectively not found an optimum price for that issue.
Towards this end, 1MDB has come out to state that it looked at all options for its recent financing and chose private placement to ensure timely completion.
The latest US$3 billion issue was raised quickly for the proceeds to be invested in an RM18 billion joint venture with Abu Dhabi, called the Abu Dhabi Malaysia Investment Corp (ADMIC), to kick-start high impact economic projects.
One possible project identified is an investment in the Tun Razak Exchange.
First, if money needs to be raised quickly, why not utilise the funds parked in Cayman Islands?
The funds were already parked there in September last year while the US$3 billion bonds were only raised in March 2013.
Also, why raise the money to be put into the ADMIC joint venture when the joint venture has yet to identify and firm up the investment project?
Some private companies undertake a debt programme to draw down the funds over time as and when required. Pengurusan Aset Air Bhd, a federal government entity, is one such body. Why 1MDB did not undertake a bond programme is something that should be explained.
M Shanmugam is managing editor at The Edge
This story first appeared in The Edge weekly edition of April 29-May 5, 2013.