The plan to rescue 1MDB and to cover a RM25 billion hole

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THE restructuring plan that is being stitched together to rescue 1Malaysia Development Bhd (1MDB) from collapsing under its mountain of debts will entail covering a hole that could be RM25 billion or more.

This estimate is based on information from various sources who have detailed knowledge of the plan that Second Minister of Finance Datuk Seri Ahmad Husni Hanadzlah had announced in general terms last week.

The only detail Husni gave was the US$1.0 billion that he said Abu Dhabi’s International Petroleum Investment Co (IPIC) had agreed to put into 1MDB on June 4.

Sources say the US$1.0 billion (RM3.6 billion) payment is in exchange for the assets held by 1MDB’s unit Brazen Sky Ltd in BSI Singapore.

Apart from the US$1.0 billion, sources say that under the plan, IPIC is to also pay 1MDB US$3.5 billion.

A sum of US$1.4 billion is the return of a 1MDB deposit kept with IPIC’s subsidiary Aabar Investments, and US$2.1 billion is for the purchase of the so-called GIL funds and the Penang land from 1MDB.

This US$3.5 billion transaction is supposed to take place in September and if it happens, it will mean IPIC is giving 1MDB US$4.5 billion.

If we dissect the numbers, we will find that IPIC is actually putting in only US$2.1 billion. This is because the remaining US$2.4 billion actually belongs to 1MDB, that is, the US$1.4 billion Aabar deposit and the US$1.0 billion it paid Aabar last September to terminate an option.

This then raises the question of why IPIC is prepared to pay US$2.1 billion out of its own pocket to take the GIL funds, whose cash value may be much lower than its paper value, and the Penang land, which has encumbrances.

Indeed, why would IPIC even agree to return the US$1 billion that it was paid for the termination of the option?

Are there conditions tied to this US$2.1 billion?

For example, is there a put option that will allow IPIC to sell these GIL funds back to 1MDB at a pre-determined price and time? Or are there other arrangements Malaysia will commit to Abu Dhabi in return for the US$2.1 billion?

One interesting fact to note is that the US$2.1 billion is about the same as the amount that 1MDB is supposed to get back from the transactions with PetroSaudi International and the Murabahah notes.

1MDB invested US$1.83 billion in those transactions between 2009 and 2011 and was supposed to have made a profit of US$300 million, and the total sum of US$2.2 billion was later invested into a fund in the Cayman Islands.

Controversial Low Taek Jho, popularly known as Jho Low, was actively involved in the PetroSaudi/Murabahah transactions, and sources say he is likely to be also actively involved in the current plan to rescue 1MDB as his help will be needed to bring IPIC on board.

Husni, when asked in a TV interview last week, tried to downplay Jho Low’s role by saying the media should not “glamorise” him.

Sources say even if IPIC does go ahead (and they say it is a big “IF” as nothing has been signed yet with IPIC) and puts in US$4.5 billion, it will not be enough to clear all the debts and liabilities at 1MDB.

As at March 31, 2014, 1MDB had debts of RM42 billion, but The Edge understands that the FY2015 accounts (not released yet and possibly not even audited yet by Deloitte) will likely show debts of around RM49 billion.

The increase of RM7.0 billion from 2014 is attributed mainly to the US$975 million loan it took last September and interest expense of around RM3.0 billion.

Sources say 1MDB hopes to clear all the RM49 billion debt by raising as much as RM49.7 billion in this manner:

1) Injection by IPIC: US$4.5 billion or RM16.2 billion

2) Sale of Edra Global Energy Bhd (power assets): RM15.0 billion

Through an initial public offering or outright sale to interested parties like Tenaga Nasional Bhd, IJM Corp Bhd and Singapore’s Sembcorp Industries Ltd

3) Sale of Tun Razak Exchange (TRX) and Bandar Malaysia land: RM18.5 billion

To be done either through sale of various parcels or all the land by tender or sale of equity in the companies that will be formed to own the land 1MDB will raise RM49.7 billion through the sales if all goes well.

But does this mean 1MDB will be able to clear the deck and that it will be the end of the controversy?

Sources say that will not be the case and they cite the following reasons:

1) The TRX and Bandar Malaysia land was sold to 1MDB in 2012 at a very low price of RM600 million. If 1MDB can now sell it for RM18.5 billion, this means that valuable land was sold cheap to 1MDB to cover a hole of RM17.9 billion.

Questions will have to be answered on what happened to the RM17.9 billion? Where or who did the money go to?

2) The extra US$2.1 billion that IPIC is putting in (over the US$2.4 billion it had taken and is going to put back) is actually another hole that is being covered under the rescue plan.

Again, 1MDB has to explain where this RM7.6 billion went to? It has to explain what happened to the money for the PetroSaudi joint venture and Murabahah notes.

To summarise, calculations by The Edge based on what we know about the rescue plan drawn up by Husni and his team show that the hole at 1MDB could, in a best-case scenario, be RM17.9 billion.

A worst-case scenario will be a whopping RM25.5 billion — RM17.9 billion + RM7.6 billion.

Given the size of the bailout, a thorough investigation must be carried out to find out where all the billions disappeared to. And all those responsible for the misdeeds that caused this massive hole must face the consequences.

 

This article first appeared in The Edge Malaysia Weekly, on June 8 -14, 2015.