1MDB Bondholders Face Threat of More Tussles Ahead of May Coupon

  • Malaysian fund must pay $52.4 million in interest on May 11
  • Game of brinkmanship being played by 1MDB, IPIC: Citigroup

Bondholders of 1Malaysia Development Bhd. face the threat of more complications ahead of another bond interest payment due next month amid a tussle with Abu Dhabi’s sovereign wealth fund that has already resulted in a default.

1MDB defaulted Tuesday on a $50 million coupon payment after the notes’ co-guarantor Abu Dhabi’s International Petroleum Investment Co. said it would only make the payment if the Malaysian fund first failed to do so. 1MDB faces a semi-annual interest payment due May 11 on separate securities also guaranteed by IPIC. The amount due is about $52.4 million, according to calculations based on Bloomberg data.

"What happens to the next debt obligation that is coming up?," said Manjesh Verma, analyst at Citigroup Inc. "Do we go through a similar situation again?"

1MDB’s default could have broader fallout. Contingent liabilities for Malaysia could amount to about $7.5 billion, or 2.5 percent of the nation’s gross domestic product in 2015, Moody’s Investors Service said in a report on Wednesday.

Broader Dispute

"We are still considering options" on the next bond payment, 1MDB President Arul Kanda said in a text message reply Wednesday to Bloomberg questions. There was no immediate reply to e-mailed questions to IPIC.

1MDB will not shy away, and looks forward to resolving the dispute with IPIC through discussions and if necessary, arbitration, to ensure an expeditious resolution, the fund said in an e-mailed statement Wednesday. Kanda said last week in an interview that the company has enough cash for the interest payment and that the non-payment is due to its broader dispute with IPIC.

"It looks like more of a political tussle rather than a lack of ability or lack of willingness to pay at this stage," said Citigroup’s Verma. "It’s a game of brinkmanship which is being played by both parties."

1MDB must make the interest payment in May on its 5.99 percent notes that mature in 2022. It issued the securities in 2012 with a $1.75 billion face value.

It’s still too early to say if the developments this week will affect the Malaysian sovereign, according to Baring Asset Management Ltd.

"The credit is still rated A-" by Standard & Poor’s, said Sean Chang, the Hong Kong-based head of Asian debt investment at the asset manager. "From the credit standpoint, it’s status quo, nothing has changed."

Still, it would be better for 1MDB to seek a fast solution for its debt default, Chang said.

"It’s no good to drag on," he added.

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