1MDB Expects Bondholders to Be Paid Amid Fight With Partner

  • 1MDB in disagreement with Abu Dhabi sovereign wealth fund IPIC
  • Malaysian fund has $550 million surplus after selling assets

Arul Kanda.

Photographer: Sanjit Das/Bloomberg

One thing is sure: 1Malaysia Development Bhd. has enough money not to default on its $1.75 billion bond. What’s not sure is who’s going to make the interest payment.

Malaysia’s debt-ridden state investment fund, 1MDB, has enough cash to pay the $50 million of interest that was due on Monday, and in fact its surplus is 11 times that amount should it decide to make the payment, President Arul Kanda said in a Bloomberg Television Malaysia interview Tuesday. 

But it’s Abu Dhabi’s sovereign wealth fund, International Petroleum Investment Co. or IPIC, which earlier agreed to pay interest on the bonds, that should be making the payment, Kanda said. The bond has a five-day grace period for making it. He expects an "amicable resolution," he said.

"We are in direct contact with IPIC, and we are seeking to work through these differences to come to a resolution," he said.

The threat of default is the latest episode in financial scandals that have rocked 1MDB, already a target of global investigations into allegations of money laundering and embezzlement. Prices on its dollar bonds plunged Monday after Abu Dhabi’s IPIC announced an end of its debt obligations to 1MDB after failure by the Malaysian fund to make payment of more than $1 billion in connection with a loan. IPIC declined further comment beyond its Monday statement.

There’s more at stake than just the conflict between the two state funds. Malaysia and Abu Dhabi are seeking to raise more money via bond sales, with Malaysia planning to sell as much as $1.5 billion of global Islamic debt. The marketing of the notes started last week and would likely have maturities of 10 and 30 years, according to two people familiar with the matter.

Abu Dhabi, the capital of the United Arab Emirates, is sounding out investors about plans to issue bonds for the first time in more than seven years as the government seeks to bolster its finances against a slumping oil price. The emirate will hold meetings with fixed-income investors in the U.A.E., Europe and the U.S. starting Tuesday, according to a person with knowledge of the plan.

IPIC Agreement

IPIC entered an agreement with 1MDB in May 2015 to provide the Malaysian fund $1 billion to settle some liabilities in exchange for a transfer of assets, as well as assume interest obligations on $3.5 billion of debt. 1MDB and its shareholder, Malaysia’s finance ministry, "are in default" on the terms of the binding term sheet with IPIC and its unit, the Abu Dhabi fund said, adding that it had met all its obligations to date.

"If IPIC doesn’t pay in terms of the binding term sheet, we will then have to assess our position because clearly it is originally our debt obligation," Kanda said. "It is always open to us to settle that issue should we decide at the right time to do so. While there is concern around investor sentiment, I think the quantum and our ability to pay is not in question."

The ringgit rose as much as 1.2 percent, the most in three weeks, after Kanda’s comments. It appreciated earlier after Brent crude recovered to $43 a barrel, quelling concern that the oil exporter’s revenue will deteriorate after prices collapsed Monday.

1MDB bonds maturing in March 2023 halted a three-day slide. The $3 billion 4.4 percent notes jumped 5 cents to 85 cents on the dollar to yield 7.2 percent as of 6:02 p.m. in Hong Kong, according to prices compiled by Bloomberg. The securities slumped 12.4 cents on April 18, the most since at least April 2014.

Bond Volatility

“There’s just too much volatility in these bonds,” said Kim Jinha, head of global fixed income in Seoul at Mirae Asset Global Investments, who has tracked the company since 2013 and doesn’t own the notes. “These bonds are for opportunistic trading, at best.”

Kanda was brought in in January 2015 when the debt-ridden fund was teetering on the edge of a loan default. 1MDB amassed more than 50 billion ringgit ($12.7 billion) of debt over six years, using some of it to buy energy assets, including joint ventures with companies in Saudi Arabia and Abu Dhabi. 

Authorities from the U.S. to Switzerland are trying to determine if some of the billions of dollars that 1MDB raised to buy energy assets were siphoned out inappropriately. 1MDB, whose advisory board is chaired by Prime Minister Najib Razak, has consistently denied any wrongdoing.

The loan dispute between 1MDB and the Abu Dhabi fund puts in doubt the progress of the company’s debt restructuring efforts, according to Moody’s Investors Service.

Possible Termination

“The only thing certain at this point would be that this dispute and the possible termination of the debt-asset swap places the progress of 1MDB’s debt rationalization plan in doubt,” Christian de Guzman, a Singapore-based senior analyst at Moody’s, said in an e-mailed response to questions.

Kanda said 1MDB has as much as 33 billion ringgit of long-term debt outstanding. The company said it has repaid all short-term and bank borrowings after selling its energy unit and part of a property project and has a cash surplus of 2.3 billion ringgit.

"We are in an extremely liquid position," Kanda said. "Non-payment, if it happens, is due to this broader dispute. It is not due to an inability to pay."

The dispute has no implications on Malaysia’s sovereign credit rating for now, as the bond in question isn’t covered by a government guarantee, YeeFarn Phua, a Singapore-based analyst at Standard & Poor’s said in an e-mail. Malaysia’s finance ministry said Monday that it “will continue to honor all of its outstanding commitments.”

After the grace period, trustees can call on the guarantee, and IPIC would have to pay within 10 days, S&P said. It rates Malaysia A-, the fourth-lowest investment grade.

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