1MDB defaults on US $1.75b bond

> Fund says it didn’t make US $50.3m interest payment despite having the means as ‘it is IPIC’s obligation to do so’

PETALING JAYA: 1Malaysia Development Bhd (1MDB) yesterday announced it had triggered a “limited” default after the non-payment of US$50.3 million (RM197.4 million) in interest on a US$1.75 billion bond it issued in 2012.

The state-owned strategic development fund said in a statement it had not made the payment despite having the funds to do so because “it is 1MDB’s position, as a matter of principle, that it was International Petroleum Investment Company’s (IPIC) obligation to do so”.

As at press time, Abu Dhabi sovereign fund IPIC had not issued a statement on the matter to the London Stock Exchange (LSE).

1MDB’s statement refers to the terms under the binding term sheet executed on May 28, 2015, under which IPIC assumed the obligation to pay the interest and ultimately the principal for, among others, the US$1.75 billion fixed rate 5.75% notes due 2022, issued by 1MDB Energy (Langat) Ltd.

The default led to cross-defaults of two other bonds, namely the RM5 billion sukuk due 2039 (1MDB sukuk) and the RM2.4 billion Bandar Malaysia Sdn Bhd sukuk due between 2012 and 2024 (BMSB sukuk).

There is also a possibility that a “material adverse effect” could be triggered on a RM800 million loan from the Social Security Organisation (Socso). The 1MDB sukuk and the Socso loan are backed by government guarantees.

Its remaining debt, the US$1.75 billion fixed rate 5.99% 1MDB Energy Ltd notes, and the US$3 billion fixed rate 4.4% 1MDB Global Investments Ltd notes, are not affected.

IPIC announced to the LSE on Monday that it would only make the US$50.3 million payment if 1MDB defaulted. It said that this was in keeping with its role as guarantor of the bond in 2012. IPIC then also maintained that it had terminated the binding term sheet agreement with 1MDB and the Finance Ministry, after they defaulted on a US$1.1 billion cash payment to IPIC.

“1MDB has been surprised by IPIC’s comments and unequivocally asserts that it has attempted to meet all its obligations to IPIC, whereas IPIC has publicly denied receipt or knowledge of various financial transactions and/or guarantees entered into between the parties,” it said.

1MDB added it has been holding back the interest payment following claims by IPIC that certain payments and other obligations are still owed to it and that until IPIC accepts that all obligations have been met, 1MDB is obliged to withhold the payments and will seek legal recourse and resolution.

In a media interview over the weekend, 1MDB president and CEO Arul Kanda Kandasamy, who prior to the release of the Public Accounts Committee report was neutral on claims of wrongdoing in 1MDB, said he did not discount that there could actually be “massive fraud” and collaboration from “our side” over payments made to British Virgin Islands-incorporated Aabar Investments PJS Ltd (Aabar BVI), which was supposed to be a unit of IPIC. IPIC has since denied any links to Aabar BVI.

1MDB said it has met and explained the dispute with IPIC to trustees and investors of the 1MDB and BMSB sukuk in the past week, and will continue to do so. “1MDB trusts that the respective parties, and the financial markets in general, will understand this unfortunate default as being very specific to its dispute with IPIC and is not due to an inability to make payment when due,” it added.

PETALING JAYA: The total size of contingent liabilities associated with 1Malaysia Development Bhd (1MDB)’s recent default that the government balance sheet is exposed to is estimated at 2.5% of gross domestic product (GDP), according to Moody’s Ratings Services.

Its vice-president and senior research analyst Christian de Guzman said the troubled Malaysian state fund which was in default after missing the deadline to make its bond repayment Monday has raised the risk on the contingent liabilities which the government balance sheet is exposed to.

The international ratings agency did not change its outlook on Malaysia. Back in January, Moody’s downgraded Malaysia’s sovereign credit rating outlook from positive to stable at A3.

Yesterday, 1MDB released a statement confirming that it defaulted on a US$1.75 billion (RM6.83 billion) bond issue, triggering cross defaults on two other Islamic notes totalling RM7.4 billion. The default has prompted a call on a guarantee by the International Petroleum Investment Company (IPIC).

“However, the cross default triggered on instruments guaranteed by the government of Malaysia, as well as an indemnity associated with the IPIC guarantee, raises the risks of the crystallisation of contingent liabilities on the balance sheet of the government of Malaysia,” de Guzman told SunBiz via email.

Moody’s noted that 1MDB’s total debt, according to latest publicly available data, which date back to 2014 was around RM42 billion, less than 4% of GDP.

However, de Guzman said, the figure does not incorporate the progress made by 1MDB over the past year in paring its debt through various asset sales.

“As such, we assume that 1MDB’s total current liabilities to be much smaller,” he said.

However, de Guzman pointed out the contingent risks associated with 1MDB’s non-guaranteed liabilities may be as high or even higher than the government’s actual explicitly guaranteed exposures.

“Moreover, the inability to rein in these off-budget risks stand in contrast to the onbudget improvements to the government’s fiscal position,” he said.

Meanwhile, Standard & Poor’s Ratings Services (S&P) does not expect 1MDB’s default to have an impact on the country’s sovereign ratings.

“We don’t see an impact on Malaysia’s sovereign ratings for now. The default on the interest payment may trigger an acceleration event on the other bonds of 1MDB,” its Malaysian sovereign analyst Yee Farn Phua said.

“On those bonds that carry a guarantee from the government or the 2023 bond with letter of support, we expect the government to make good on those obligations should 1MDB fail to pay,” he said.

The local bourse and the ringgit took a hit yesterday, with the announcement of 1MDB’s default.

The FTSE Kuala Lumpur Composite Index (KLCI) fell 0.58% in just 55 minutes after the opening bell. Heavy selling pulled the Malaysian stock benchmark below the critical 1,700-point level after the lunch break. The KLCI closed at 1,92.50, down 1.28% or 22.01 – its biggest loss in nearly a month.

The ringgit meanwhile, declined for a fourth day, falling 0.55 % to 3.9290 per dollar – its biggest slide in a month.

The Finance Ministry did not respond to a request for comment.