Malaysia's 1MDB Sells Power Unit in Step to Wind Down Operations

Updated on
  • China General Nuclear will assume all Edra's debt and cash
  • Ringgit, bonds rally as investors see `light' for 1MDB

1Malaysia Development Bhd. agreed to sell its power assets to China General Nuclear Power Corp. for 9.83 billion ringgit ($2.3 billion) as the state investment company moved one step closer to winding down operations after its mounting debt raised investor concern.

China General Nuclear will assume all gross debt and cash of Edra Global Energy Bhd. and its subsidiaries, according to a joint statement released Monday. The transaction is expected to be completed in February.

1MDB, whose advisory board is headed by Prime Minister Najib Razak, announced plans in February to dismantle its assets after it drew criticism from lawmakers for accumulating about 42 billion ringgit of debt in less than five years of existence. The company came under added scrutiny after it almost defaulted on a loan and clouded the sovereign’s credit rating with its borrowings weighing on the government’s contingent liabilities.

"1MDB is at the center of a political scandal that, with falling oil prices, has weighed on Malaysian financial asset prices," said Tim Condon, head of Asia research at ING Groep NV in Singapore. "We expect investors will see the news as a hopeful sign of light at the end of the 1MDB scandal tunnel."

Ringgit Advances

The ringgit rose 0.9 percent as of 10:30 a.m. Tuesday, leading gains in Asia, while the benchmark FTSE Bursa Malaysia KLCI Index advanced 0.6 percent. Malaysia’s $1 billion of 3.043 percent Islamic notes due in 2025 climbed 0.2 cents to 96.7 cents on the dollar, the highest since Oct. 29, to yield 3.45 percent, prices compiled by Bloomberg showed. The notes were sold to investors at par, or 100 cents on the dollar, in April.

1MDB’s $3 billion of 4.4 percent notes due 2023 rose 0.7 cents to 88.2 cents on the dollar in Hong Kong Tuesday, the highest since July 2, to yield 6.45 percent, according to prices compiled by Bloomberg. The notes were sold to investors at par in March 2013.

Tenaga Trumped

China General Nuclear won the international tender for Edra, trumping Malaysia’s energy producer Tenaga Nasional Bhd. The ringgit is down about 18 percent against the U.S. dollar this year, the worst performer in Asia, and has made it cheaper for foreign bidders to buy the 1MDB power plants.

1MDB owns a net generation capacity of 5,594 megawatts and is the largest independent power producer in Bangladesh and Egypt, according to its website. Besides investments in plants in Pakistan and the United Arab Emirates, it has 3,112 megawatts of capacity in Malaysia, making it the nation’s biggest independent power producer after Malakoff Corp.

Tenaga, a Kuala Lumpur-listed utility controlled by the nation’s sovereign fund, is wary of overpaying because it needs to justify any acquisition to shareholders, people with knowledge of the matter said earlier this month. Its shares had fallen in recent months on concern it would have to pay an inflated price for the assets. Tenaga rose as much as 5.5 percent Tuesday, poised for the highest close in six months.

"We are positive on the news, which will put an end to speculations and concerns on Malaysia-listed power utility companies, especially Tenaga, in bailing out 1MDB at high valuation," said Daniel Wong, a Kuala Lumpur-based analyst at Hong Leong Investment Bank Research.

Under Investigation

1MDB has been the subject of overlapping investigations amid allegations of financial irregularities, although an initial Auditor General’s report didn’t reveal any suspicious activity. Najib has resisted calls from ex-premier Mahathir Mohamad to step down over the fund’s performance.

The company faced cash-flow problems after a planned initial public offering of Edra faced delays amid unfavorable market conditions, President Arul Kanda said Oct. 31. The listing plan was later canceled as the company opted for a sale of the assets.

The sale is a "significant milestone of the Edra monetization process," Kanda said Monday. "The purchase by CGN Group brings a significant foreign direct investment commitment to Malaysia and is a clear vote of confidence in the Malaysian economy."

Foreign investors are normally only allowed to own as much as 49 percent of Malaysian power producers unless they obtain a waiver as the government provides gas to electricity plants at subsidized prices. While the statement stated the Chinese company is buying all of 1MDB’s ownership in the energy assets, it didn’t say whether the buyer has been given an exemption.

‘Major Commitment’

China General Nuclear will "adhere to the fixed terms of the respective power purchase agreements, for the benefit of the people of Malaysia,” Chairman He Yu said in the joint statement. "This investment represents a major commitment by CGN Group as part of a long-term, global diversification initiative."

The state-owned company would join coal producer China Shenhua Energy Co., which is also a major power generator, in seeking electricity deals in Southeast Asia. Shenhua said Friday a consortium it’s leading ranked first on a shortlist of preferred bidders for the development of a coal-fired project in Indonesia.

Maybank Investment Bank Bhd. advised 1MDB on the transaction, while Rothschild & Co. and HSBC Holdings Plc acted as financial advisers to Edra and China General Nuclear respectively.