KUALA LUMPUR (April 22): Moody's Investors Service said it will not view International Petroleum Investment Co (IPIC) as having defaulted unless IPIC fails to honour its contractual obligations within the time period that is specified in the guarantee document.

In a statement today regarding the update on the US$3.5 billion of 1MDB-issued notes guaranteed by IPIC, Moody's noted that on April 18, media and press releases involving both IPIC (Aa2 ratings on review for downgrade) and 1Malaysia Development Bhd (1MDB) has indicated that a US$50.3 million coupon payment due on April 18, 2016 was not made with respect to the US$1.75 billion 5.75% notes issued by a subsidiary of 1MDB and guaranteed by IPIC.

"Although this particular debt instrument is not rated by Moody's and we understand it to be a private placement, we fully expect IPIC to honour its financial obligations on a timely basis in its role as a guarantor if and when the guarantee is called upon by the trustee of the notes, pursuant to a non-payment of 1MDB as the primary obligor, and subject to the confidential terms and conditions of the notes," it said.

The rating agency said it understands that there is a five-day grace period from the time of the missed coupon after which the guarantee will be called. Moody's has not assessed the strength of the guarantee for this particular unrated note, and it is unclear at this stage whether there are any carve-outs specified in the guarantee document.

"In this context, Moody's will not view IPIC as having defaulted unless it fails to honour its contractual obligations within the time period that is specified in the guarantee document.

"It is our understanding that there is a dispute regarding contractual obligations under a distinctly separate side agreement signed on May 28, 2015 between IPIC, Aabar (an unrated IPIC subsidiary), 1MDB and the Ministry of Finance (MoF) of Malaysia (A3 stable).

"We understand that under this confidential binding term sheet, some details of which were disclosed publicly in a London Stock Exchange (LSE) filing, IPIC made a US$1 billion cash transfer to 1MDB on June 4, 2015 and also agreed to assume coupon payments on US$3.5 billion of 1MDB-issued debt (two US$1.75 billion IPIC guaranteed notes) for a one-year time period subject to certain undertakings involving asset transfers to IPIC by 1MDB and/or the MoF," Moody's said.

The rating agency said based upon the limited information it has regarding this agreement, it currently view this debt-to-asset swap to be primarily a commercial contract between two parties, though it is also understood the MoF is party to significant obligations, and as such, IPIC's decision to cease assumption of coupon payments to be in the context of a commercial dispute which potentially could lead to legal recourse by multiple parties.

However, irrespective of the course of events that may unfold related to this side agreement, Moody's continues to expect that IPIC will not default on its financial obligations as a guarantor.

The rating agency noted that IPIC has guaranteed two distinct 1MDB-issued notes, namely the US$1.75 billion 5.99% notes issued by 1MDB Energy Ltd (1MDBEL) due in May 2022; and US$1.75 billion 5.75% notes issued by 1MDB Energy (Langat) Ltd (1MDB Langat) due in October 2022.

Moody's said it did not rate either of the 1MDBEL or 1MDB Langat entities; however, the US$1.75 billion 5.99% notes issued by 1MDBEL have a Aa2 (ratings on review for downgrade) instrument rating because the notes are unconditionally and irrevocably guaranteed on a joint and several basis by IPIC (the other party being 1MDB).

With respect to the missed coupon payment on the unrated 1MDB Langat notes, Moody's noted that public news sources have cited a five-business-day grace period from the time of the missed coupon payment after which the trustee will need to notify the guarantor.

"We therefore at the current stage do not view IPIC to have defaulted on its financial obligations but continue to monitor events closely. We note that the ratings on the 1MDBEL notes were placed on review for downgrade on March 8, 2016 as a direct consequence of the credit linkages that we see between the Abu Dhabi government (Aa2 ratings on review for downgrade), IPIC and the 1MDBEL notes," it said.

The Aa2 ratings of the Abu Dhabi government were placed on review for downgrade on March 4, 2016 to assess the impact of low oil prices.

The ratings of IPIC were placed on review for downgrade on March 8, 2016 as Moody's has aligned the ratings of IPIC with that of the government of Abu Dhabi given the intrinsic linkages it sees between the two entities.