Malaysian Prime Minister Najib Razak is facing calls before a weekend election to justify a $3 billion bond placement by the sovereign-wealth fund he leads, with opponents saying the deal was unnecessary and mispriced.
Goldman Sachs Group Inc. arranged the March 19 sale of 10-year debt by 1Malaysia Development Bhd., also known as 1MDB, and the notes were priced to yield 4.4 percent, 141 basis points more than sovereign Islamic dollar bonds due July 2021 were yielding at that time. The 1MDB yield was 3.76 percent today, giving investors who were in at the start a return of 5.7 percent for the six weeks since the debt was issued. U.S. Treasuries gained 1.43 percent on average during the period, according to a Bank of America Merrill Lynch index.
“The private placement raised too many red flags, coming so close to the election date,” said Wong Chen, a 44-year-old corporate lawyer and a parliamentary candidate from the opposition National Justice Party. “They were rushing this out and they don’t know how to spend it. We don’t know who received this private placement and who they may sell it on to.”
Najib is chairman of the board of advisors of 1MDB and the March bond sale has given candidates opposing him in the May 5 polls ammunition to criticize the fund, with Wong calling for more transparency. The accusations are part of a smear campaign before the voting, according to a government spokesman, who’s not authorized to be named. Recent opinion polls suggest that the election will be tight with the opposition alliance having gained support in recent months, Bank of America Merrill Lynch said in a report published today.
1MDB considered all of its options in raising debt before the March sale and chose the Goldman-led structure to “ensure the timely completion of this economic initiative,” it said in an April 23 statement. The $3 billion will be used for investments in “strategic and important high-impact projects like energy and real estate,” which are part of a collaboration agreement between Malaysia and Abu Dhabi, it said.
The fund will not elaborate further on the sale, said Shahriza Embi, a spokeswoman. 1MDB Chief Executive Officer Mohd Hazem Abd Rahman was not available to comment. Goldman spokesman Edward Naylor declined to discuss details of the March bond sale.
Goldman was selected for the placement after arranging a $1.75 billion bond issue for 1MDB in May 2012, as well as having raised $1.6 billion in two offerings on behalf of the Sarawak state government in the past two years.
The New York-based bank’s fees for the four sales exceeded $200 million, a sum equivalent to 3.1 percent of the money raised, according to a person familiar with the matter. Korea Development Bank, which is state-linked and rated A by Standard & Poor’s, paid 0.3 percent for a $500 million debt sale in January. 1MDB’s March issue was unrated at the time of sale and graded A- on April 12 by S&P, which noted that government support for the issue differed from an outright guarantee.
“Should the government fail to honor the obligations, a claim under the letter of support would be for damages for breaches of contract, rather than the amount of principal and interest of the notes,” S&P said in its rating announcement.
Global bond sales that raise $3 billion are typically underwritten by several banks, which market the securities to investors. Wong, who is also chairman of the opposition’s investment and trade bureau, said local banks have “bare minimum fees” and should have been involved in any debt sale by a government-linked issuer. Goldman competes “aggressively” against a strong field of banks for business in Malaysia, said Naylor, declining to comment on fees received for the 1MDB debt sales.
“We perform the same consistently high global standards of due diligence and business selection in connection with all securities offerings,” Naylor said in an e-mailed statement. “Clients seek us out for our ability to develop and deliver complex financing solutions individually tailored to meet objectives that might not be achievable through more conventional structures or through the public markets.”
Kuala Lumpur-based 1MDB has 19.8 billion ringgit ($6.5 billion) of bonds outstanding, according to data compiled by Bloomberg. The company signed agreements with Aabar Investments PJSC, a company controlled by Abu Dhabi’s state-owned International Petroleum Investment Company, to co-invest 18 billion ringgit in projects in Malaysia, it said in a March 12 e-mailed statement.
1MDB also is developing an $8.5 billion financial district in Kuala Lumpur called the Tun Razak Exchange development. It bought billionaire T. Ananda Krishnan’s electrical power generation business for 8.5 billion ringgit in March last year and Genting Bhd.’s domestic energy operations for 2.3 billion ringgit in August.