Ringgit Declines for Fourth Day as 1MDB Default Drags on Stocks

  • Benchmark share index closes at lowest level in six weeks
  • Malaysia credit risk rises as 1MDB's dollar bonds slide

The ringgit fell for a fourth day in its longest stretch of losses since November and stocks dropped to a six-week low as troubled state investment company 1Malaysia Development Bhd. confirmed it’s in default after missing an interest payment on bonds.

The company is withholding a $50 million payment on $1.75 billion of dollar notes amid a dispute with International Petroleum Investment Co., Abu Dhabi’s sovereign wealth fund that is the co-guarantor of the bonds maturing in 2022, according to an e-mailed statement. The deadline was on Monday. The cost to insure Malaysia’s government debt rose to the highest level in seven weeks and ringgit yields surged.

“At the margin, this has to be negative for the ringgit,” said Nizam Idris, the Singapore-based head of strategy for fixed income and currencies at Macquarie Bank Ltd. “Obviously, contingent liability on the government as well as rating risk is there.”

The currency closed 0.4 percent lower at 3.9245 per dollar in Kuala Lumpur after earlier depreciating as much as 1.1 percent, according to prices from local banks compiled by Bloomberg. It has declined 0.6 percent in April. The five-year bond yield rose two basis points to a one-month high of 3.46 percent, prices from Bursa Malaysia show.

"Whilst 1MDB has the funds to have made the interest payment, it is 1MDB’s position, as a matter of principle, that it was IPIC’s obligation to do so," the company said. "Until IPIC accepts that all obligations have been met, 1MDB is obliged to withhold payments and will seek legal recourse and resolution."

1MDB Bonds

Five-year credit-default swaps climbed three basis points to 165 basis points, the highest since March 9, according to data provider CMA.

The price of 1MDB’s 4.4 percent dollar bonds due in 2023 dropped 3 cents on the dollar to 87 cents, Bloomberg-compiled data show. The yield surged 65 basis points to 6.81 percent. The three-year sovereign note yield climbed five basis points to 3.32 percent, the steepest increase since Feb. 24.

The FTSE Bursa Malaysia KLCI Index of shares retreated 1.3 percent.

The missed 1MDB payment triggered cross defaults on 7.4 billion ringgit ($1.9 billion) of the company’s debt, according to the statement. The firm has been in dispute over its debt obligations to IPIC under an agreement reached in May last year. As part of the pact, the wealth fund said then it would assume obligations to pay interest due under $3.5 billion of 1MDB bonds that it guaranteed. IPIC said this month that Malaysia’s state fund was in default after failing to pay it more than $1 billion in connection with a loan.

Standard & Poor’s said in a e-mail it doesn’t see any impact on Malaysia’s A- rating, its fourth-lowest investment-grade ranking, from 1MDB. Moody’s Investors Service said its view on 1MDB is “relatively intact” because of the IPIC guarantee.

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