1MDB's Abu Dhabi Woes Put Restructure in Doubt, Moody's Says

  • Five-year Malaysian CDS rose most in four weeks on Monday
  • Malaysian government says will honor outstanding commitments

A loan dispute between 1Malaysia Development Bhd. and the Abu Dhabi sovereign wealth fund puts in doubt the progress of the Malaysian state investment company’s debt restructuring efforts, according to Moody’s Investors Service.

The credit assessor was responding to a stock exchange filing by Abu Dhabi’s International Petroleum Investment Co. that 1MDB failed to make a payment of more than $1 billion in connection with a loan extended last year. That means 1MDB and Malaysia’s finance ministry “are in default,” IPIC said in the filing to the London exchange. The ministry said in a statement it “will continue to honor all of its outstanding commitments.”

1MDB is in the midst of selling assets after it amassed more than 50 billion ringgit ($12.8 billion) of debt over six years. The embattled company had drawn criticism from opposition lawmakers who called for the resignation of Prime Minister Najib Razak, who chairs the firm’s advisory board. 1MDB said in a statement on Monday that it has repaid all short-term and bank borrowings, and has a 2.3 billion ringgit surplus.

“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 by e-mail in response to questions from Bloomberg.

The company’s dollar bonds rebounded, while the cost to insure the nation’s government debt from default rose to the highest this month. The benchmark stock index dropped for a second day, while other key Asian gauges increased.

IPIC entered an agreement with 1MDB in May 2015 whereby it would provide the Malaysian fund with $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.

The latest development leaves 1MDB’s bondholders waiting for an interest payment due Monday that may never come. The Abu Dhabi fund indicated it no longer has an obligation to make the payments, and 1MDB didn’t say if it would step in. Failure for either side to fulfill the debt obligation could result in the Malaysian company’s first default since its inception in 2009.

The price of 1MDB’s 4.4 percent notes due in 2023 jumped 4.3 cents on the dollar to 84.3 cents as of 12:08 p.m. in Kuala Lumpur, after slumping Monday by the most since at least April 2014, according to Bloomberg-compiled data. The yield fell 91 basis points to 7.36 percent. Five-year credit-default swaps on Malaysian bonds rose 11 basis points to 163 basis points on Monday, the biggest increase in four weeks, CMA prices show.

Contingent Liabilities

Moody’s referred Bloomberg to a Jan. 11 statement when asked about the impact of the dispute on Malaysia’s sovereign rating. In that statement, the rating company said a significant worsening in the nation’s debt dynamics due to an inability to contend with lower commodity prices “or the crystallization of large contingent liabilities, could exert downward pressure on Malaysia’s rating.” Moody’s rates Malaysia A3, the fourth-lowest investment grade.

A recovery in Brent crude after Monday’s plunge helped support the ringgit. The currency strengthened 0.8 percent to 3.8942 per dollar in Kuala Lumpur after falling 0.6 percent the day before. It’s appreciated 10 percent this year, the most among major Asian currencies after the yen.

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