Malaysia’s 1MDB to Break Up Assets, Signaling Wind Down

1Malaysia Development Bhd., set up by the government five years ago to build infrastructure with borrowed money, will break up its assets, winding down after drawing political criticism and almost failing to repay loans.

The state investment company won’t undertake any new investments or projects after it sets up standalone entities for its two major property projects and raises cash from selling its power business, it said in a statement in Kuala Lumpur today. 1MDB will also sell or form joint ventures for other land it holds, signaling it plans to wind down.

1MDB, whose rising debt had drawn criticism from opposition lawmakers and former Prime Minister Mahathir Mohamad, flirted with default earlier this month after delaying payment on a 2 billion ringgit ($557 million) loan. Fitch Ratings has said the country’s contingent liabilities such as 1MDB’s borrowings are weighing on the sovereign rating outlook.

“1MDB’s purpose is to serve as a catalyst, developing assets and projects of strategic importance, with a view to creating maximum value for the economy,” the company said. “Having achieved this, 1MDB will not undertake any new investments or projects, and we have developed a clear strategy for each of our existing businesses moving forward.”

1MDB, whose advisory board is headed by Prime Minister Najib Razak, said it expects to implement the plans over the next 12 months.

Oil Origins

Its $3 billion of 4.4 percent 2023 bonds rose 0.6 cents, the most in two weeks, to 87.5 cents on the dollar as of 5:20 p.m. in Kuala Lumpur, according to prices compiled by Bloomberg. The notes were sold to investors at par, or 100 cents on the dollar, in March 2013.

The company has its origins in Terengganu Investment Authority, which was created in 2009 to invest oil royalties from the state of Terengganu. When Najib became prime minister that year, it was renamed 1MDB, became a national entity and its funding source was changed to government-backed debt instead of oil income.

It built an energy business by acquiring assets from Malaysian billionaire T. Ananda Krishnan and Genting Bhd., and planned a new financial district in Kuala Lumpur known as Tun Razak Exchange with land purchased from the government.

The company came under scrutiny in parliament in 2013 after singling out Goldman Sachs Group Inc. to oversee the sales of $6.5 billion of conventional dollar bonds. Opposition politicians said the amount the U.S. investment bank made in commissions and trading gains were excessive. Goldman Sachs made about $500 million for managing the sales, a person familiar with the matter said in May 2013.

Not Appropriate

1MDB’s borrowings climbed to 41.9 billion ringgit in the year ended March from 36.2 billion ringgit in the previous period, it said in November.

“We recognize that our debt-financed capital structure is no longer appropriate for the company, and intend to take measures to ensure that 1MDB and the standalone entities are well positioned to service debt and infrastructure obligations,” President and Group Executive Director Arul Kanda said in the statement.

Kanda was hired last month to head the strategic review. He defended 1MDB’s credentials as a borrower in an interview with Bloomberg News last month, saying the company had never defaulted.

Mahathir, who governed Malaysia from 1981 to 2003, said in November that 1MDB is only serving to increase the nation’s debt and the country would be fine without it.

Power IPO

1MDB is preparing for an initial public offering of its power-plant assets this year, people with knowledge of the sale said in November. The company said today a portion of the proceeds from the monetization of the energy business will go toward repayment of short-term debt.

The company’s two major real estate projects, Tun Razak Exchange and Bandar Malaysia, will be run “with independent governance structures, and responsibility for their own operations and finances,” it said today. The new entities will sell land development rights or enter into joint ventures in part for financing projects.

“Of concern really would be what is the market valuation for each asset vis-a-vis for debt that was taken to acquire,” said Geoffrey Ng, an adviser for strategic investments at Fortress Capital Asset Management Sdn. in Kuala Lumpur, which oversees about 1 billion ringgit. “It is one thing to say that the assets will be broken up and monetized, but would that be sufficient to cover the financing that was taken as a result of these assets?”

The Tun Razak Exchange financial district is being constructed on 70 acres of land near the Petronas Twin Towers in downtown Kuala Lumpur. Named after Najib’s father, who was the country’s second prime minister, the development has a projected sales value of 40 billion ringgit.

Bandar Malaysia, located three kilometers away, is a 495-acre mixed-use project that will include a terminal for the proposed high-speed train to Singapore. It has a projected sales value of 150 billion ringgit.

Before it's here, it's on the Bloomberg Terminal.