Monday, May 25, 2015

1MDB's Cash Crunch.

The next nine years are crucial for fund, as its obligations are estimated at some RM40 billion.

THE recipe for the downfall of any company is taking on short-term debt to fulfil long-term projects. This is what symptomises 1Malaysia Development Bhd’s (1MDB) ills, which needs some RM40bil in the next nine years to meet its debt obligations.

The increasing limelight that the fund has come under – not only from politicians but also from the man in the street – does not help its case either.

The tipping point for 1MDB to be a topic of discussion among the kampung folk is Lembaga Tabung Haji’s (LTH) purchase of a parcel of land in the Tun Razak Exchange (TRX) that is to be developed by 1MDB for RM188.5mil.

The momentum increased when a video of Umno deputy president Tan Sri Muhyiddin Yassin telling members in a closed-door party function that the 1MDB issue had to be resolved now and that the board and management must be replaced emerged.

It is easy to fathom why the debt-laden 1MDB issue has to be resolved quickly. The fund has taken loans from banks and the capital market to purchase assets, including independent power producers, while failing to generate sufficient cashflow.

1MDB has cashflow problems, something that even Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah has admitted to. This has raised questions on the company’s ability to meet its debt obligations of RM42bil.

Estimates based on publicly available data and current market prices have put its annual interest payment cost at RM1.4bil a year between 2016 and 2022.

What is even more worrying is the massive principal bullet payments of RM13bil in 2022, RM10.9bil in 2023 and RM1bil in 2024.

Altogether, 1MDB has debt and interest commitments of about RM14.5bil in 2022 and another RM11.7bil in 2023, assuming bullet repayments of the principal at the maturity of its loans.

This year, 1MDB has obligations of RM5bil to meet, and the bulk of it is in the form of a US-dollar term loan amounting to US$975mil (RM3.5bil) that matures on Aug 31.

“But we have to bear in mind that some of the debt can be refinanced if 1MDB’s credit standing improves,” says a banker.

Nevertheless, the next nine years will be crucial for 1MDB. Adding on to the burden is that the bulk of the liabilities are in US dollar-denominated bonds and notes. Based on the notes in the latest annual report, 1MDB has been using money raised for development projects to meet its debt obligations, including the servicing of interest.

For instance, according to its financial report, 1MDB has redeemed US$2.3bil in segregated portfolio company in Cayman Islands and has received US$1.2bil, with the remaining redemption of US$1.23bil to have been received last November.

The company said the US$1.2bil has been utilised for debt interest payment, working capital and payments to Aabar Investments PJSC to extinguish the options agreement.

Similarly, a portion of the money utilised for the development of TRX has been used to settle debt obligations.

On March 19, 2013, 1MDB Global Investments Ltd, a subsidiary company, issued debt papers worth US$3bil, with the money to have been used as capital to develop TRX jointly with Abu Dhabi Malaysia Investment Co Ltd.

According to the 2014 accounts that were signed off by Deloitte, a portion of the proceeds amounting to US$1.5bil had been placed in various investment portfolios under the custody of a licensed financial institution with good credit ratings.

“In 2014, the remaining net proceeds had been utilised by the company for working capital and debt repayment purposes,” 1MDB said in the report.

According to the 2014 annual report, the finance cost for its debts in 2014 stood at RM2.39bil while in 2013, it was RM1.61bil.

The cashflow situation of 1MDB has prompted lenders to recall their debts due from the Government-sponsored fund earlier than scheduled.

Towards this end, a consortium of banks in Singapore led by Deutsche Bank has asked for the repayment of the US$975mil loan months ahead of its due date.

According to the report, the lenders were jittery after doubts arose on the collateral of the loan held in a foreign bank based in Singapore.

“The Singapore office has come under pressure from Deutsche Bank Global. It has bigger issues such as the situation in Greece to worry about and does not want to be bogged down with too many problems,” says an executive.

What is even more disturbing is that the Government has revealed that 1MDB does not have cash in the Singapore bank but assets.

Ahmad Husni did not elaborate on the form of assets 1MDB had, but stressed that the savings were in the form of “units”.

He added that the units were backed by sovereign wealth funds and that the Government hoped to repatriate those funds as soon as possible.

The 1MDB fiasco is also beginning to drag down the auditors who have given it a clean bill of health since its inception in 2009.

The Public Accounts Committee (PAC) chairman Datuk Nur Jazlan Mohamed says the auditors seem to have applied the lower end of the auditing standards in arriving at their unqualified opinion of the accounts.

“I am going to focus on a few major accounting principles in the preparation of the accounts, which seem to have been applied with the lower end of the auditing standards, which high-risk and high-economic-impact government-linked companies (GLCs) like 1MDB should not use in the preparation of accounts,” he says (see separate story on the PAC).

Independent economist Lee Heng Guie says the sooner the issues surrounding 1MDB are resolved, the better. It will provide assertion from the Government on how to address the lingering uncertainly involving 1MDB amid all the negative perception.

“To a certain extent, the market and the economy will be somewhat dampened,” he tells StarBizWeek.

He says the Government needs a more proactive approach in handling 1MDB’s issues and cannot let it continue to drag. Its accountability is at stake.

Putting things in perspective, Lee says an RM42bil debt is a huge amount in terms of gross domestic product exposure.

He hopes that everything can be resolved soon, as there will be implications on the Government’s credibility, given that 1MDB is a company under the Finance Ministry.

“There will be fiscal implications to the Government if 1MDB were to need further injections,” he says, adding that hopefully, there would be no more future injections from what the Government had already given the fund.

On the bright side, Lee says it is good that the Government is reportedly working on restructuring 1MDB and presenting the proposal to the Cabinet next week.

Reminiscent of Renong?

The problems of 1MDB today remind one of the collapse of Renong Bhd in 2001. The conglomerate had assets but lacked cashflow. It funded long-term projects with short-term funding. Renong had debts of more than RM20bil in the late-1990s. There was also an RM3.2bil put option that its major shareholder, Tan Sri Halim Saad, had to fulfill. Halim claimed he had wanted to fulfil the option and could have got Renong out of the debt quagmire but was not allowed to do so.

Eventually, Khazanah Nasional Bhd took over Renong. It spent some RM5.2bil in that exercise.

The reason was that the Government could not afford the collapse of Renong, which would have impacted the banking system. Likewise, a default in 1MDB would trigger a cross-default of its loans and also impact the credit rating of the Government.

“This is why a committee comprising the likes of Ahmad Husni is looking into resolving 1MDB’s problems,” says an official.

1MDB’s present predicament is due to over-paying for the power assets it had acquired from the Genting Group and the Tanjong Group in 2012. The fund has also come under scrutiny for acquiring 260 acres of land in Penang for RM1.38bil in April 2013. The fund’s strategy of raising money in the country and putting it outside with foreign fund managers also does not help. A delay in the listing of its energy arm, Edra Global Energy Bhd, is not helping matters either.

Although 1MDB has assets in TRX and Bandar Malaysia, these will take time to be monetised. In this respect, 1MDB said it would sell land development rights and/or enter into profit-sharing joint ventures with regards to TRX and Bandar Malaysia.

But who will be the takers?

In a meeting of GLCs two weeks ago in Putrajaya, the GLCs were told of opportunities in TRX.

But the question is: Which GLC would put in money after seeing what LTH is going through?

Although 1MDB’s assets outstrip its liabilities, its financials are unsustainable due to the debt obligations. Hence, this has forced the hand of the Government to step in and resolve the problem.

Ahmad Husni says he is in the midst of completing a report on 1MDB’s restructuring plan, which would be submitted to the Cabinet next week.

Furthermore, Prokhas Sdn Bhd, the in-house restructuring outfit of the Finance Ministry, has been tasked to help 1MDB deal with its cashflow problems tied to its debt obligations.

This certainly should not surprise anyone.


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