Trouble at 1MDB from day one

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This article first appeared in The Edge Financial Daily, on April 8, 2016.




KUALA LUMPUR: Just three months after its inception in February 2009, 1Malaysia Development Bhd (1MDB), then known as Terengganu Investment Authority Bhd (TIA), racked up RM5 billion in debt guaranteed by the Malaysian government.

According to the Public Accounts Committee (PAC), the RM5 billion bond was issued against the wishes of the TIA board, but management pushed it through at the behest of the now-notorious Low Taek Jho (Jho Low), who was then an adviser to TIA.

The PAC report that was released yesterday shows that the chief executive officer at the time, Datuk Shahrol Azral Ibrahim Halmi, proceeded with AmBank Bhd to issue the RM5 billion Islamic Medium Term Notes (IMTN), despite urgent and direct instruction from his board to abort the exercise.

Shahrol had argued that the board had no authority to halt the issuance. Instead, under Section 117 of TIA’s memorandum and articles of association, the authority fell solely under the TIA’s shareholder — the Minister of Finance (Inc) (MoF [Inc]).

While Shahrol was sacked by the board for his actions, once Terengganu’s representatives washed their hands of TIA, Shahrol was reappointed with the help of fellow director Tan Sri Ismee Ismail, according to PAC.

Interestingly, there is no mention of the MoF (Inc)’s direct involvement with the issuance in the report. Instead, the report highlights Jho Low and Datuk Abdul Aziz Mohd Akhir as two special advisers to the TIA that pushed for the RM5 billion IMTN to be issued as swiftly as possible.

According to the report, both Jho Low and Abdul Aziz were appointed as special advisers on April 8, 2009, less than two months after TIA was formed on Feb 27 in the same year.

Jho Low’s involvement raises even more questions due to discrepancies in Shahrol’s statements to the PAC regarding a meeting that involved the special advisers.

According to Shahrol, “the issuance of the IMTN was hastened [at] the request of TIA’s special advisers for a development in Pulau Bidong, Terengganu, together with Abu Dhabi’s Mubadala Development Company in 2009”.

This statement was corroborated by AmBank representatives who were also present at this meeting. However, Mubadala on May 23, 2009, denied any involvement in Malaysian projects other than Iskandar Malaysia, Johor.

Did TIA’s special advisers mislead the company?

Note that the PAC was unable to question Jho Low, so his version of the events aren’t on record. However, note that it was always TIA’s plan to issue debts.

The board on March 25, 2009, passed a resolution that granted Shahrol the power to appoint AmBank as the lead arranger and lead manager and primary subscriber for the proposed RM5 billion IMTN. This was before the special advisers were appointed.

The intention of raising the funds was very different at the time. The TIA was supposed to be a sovereign wealth fund under the purview of the Terengganu state government via the state’s Menteri Besar Inc (MBI). Along with the debts of RM5 billion, the federal government was supposed to inject RM6 billion in outstanding oil royalty payments to the state.

Hence, in the first board meeting on April 15, 2009, the board approved the proposed RM5 billion IMTN with a tenure of 30 years. By May 13, 2009, the Terengganu menteri besar would give the state’s written approval for the issuance — but with several conditions. One was that the ownership of TIA be transferred to the state.

The conditions set by the state, however, were not met.

Hence, on May 22, 2009, TIA’s board passed a resolution instructing Shahrol to halt the IMTN issuance on an “urgent basis”.

The board also suspended the authority given to Shahrol and all other directors with regards to the issuance. Keep in mind that Shahrol was also a director of the TIA at the time, along with Ismee and MBI’s representative, Tengku Rahimah Sultan Mahmud.

Despite the direct instruction and the withdrawal of authority, Shahrol and the company secretary three days later on May 25, 2009, signed the subscription agreement for the bonds with AmBank.

In the PAC report, Shahrol claimed he had no choice but to proceed with the issuance because of the short notice given by the board. The agreement for the bonds had already been signed on May 15, 2009. Halting the deal suddenly would have damaged the credibility of TIA, he claimed.

More interestingly is his assertion that the board had no authority over the matter. Citing Section 117, he claims only the shareholder has the authority to decide, which in this case is MoF (Inc). 

There is no mention in the PAC report on whether Shahrol was acting on direct instructions from the shareholder.

Subsequently, the board passed a resolution to sack Shahrol on May 27, 2009. MBI, unhappy with the turn of events, formally objected to the conduct of the company with relation to the IMTN issuance. Subsequently, the state’s representative on the board, Tengku Rahimah, would resign.

Oddly, Ismee and Shahrol would pass a resolution on the same day that reinstated Shahrol, while resuming the issuance of the IMTN. By May 29, 2009, the RM5 billion issuance was completed.

TIA would only receive RM4.385 billion from the issuance because the debts were issued at a steep discount of 12.08%, or RM87.92 for every RM100.

This does not include the profit rate (the interest rate for Islamic instruments) of 5.75% per annum. Due to the discount, the effective profit rate is 6.68% per annum.

In total, 1MDB will have to spend RM13.625 billion to repay the IMTN — RM5 billion in principal and RM8.625 billion in profit payments. On top of that, AmBank charged RM11.25 million for arranger fees, and RM238,000 per annum for trustee fees, which work out to RM7.14 million over the 30-year tenure.

Ultimately, the funds were not used for its original intended purpose — as a sovereign wealth fund that would aid the development of Terengganu. Instead, the RM5 billion in debts were repurposed under 1MDB, a strategic investment fund.