Default renews talk of sovereign downgrade
> Market awaiting IPIC’s response to Malaysian fund’s move
PETALING JAYA: 1Malaysia Development Bhd’s (1MDB) default on a US$1.75 billion (RM6.85 billion) bond issue has reignited speculation of a sovereign downgrade with heightened fiscal risks.
“We now expect speculation of sovereign downgrade to resurface, despite a mini rally in crude oil prices that has removed the oil revenue uncertainty,” HLIB Research economist Sia Ket Ee said in a report yesterday.
Currently, it is still unclear whether International Petroleum Investment Company (IPIC), the sole guarantor of the bond, will honour the payment. As at press time, the group had not made a muchawaited statement to the London Stock Exchange on the matter.
“In the scenario where IPIC decides to default and ultimately call on the guarantee of the Malaysian government on the US$1.75 billion bond, the additional liability (circa RM6.9 billion) could potentially balloon the fiscal deficit level by 0.6 percentage point (ppt) to 3.7% of gross domestic product (GDP),” he said.
Sia also expects the ringgit, which fell at the news of the default, to experience weakening bias to above RM4 to the greenback in the near term on macro concerns.
Nevertheless, he kept his ringgit yearend forecast unchanged at RM3.804 to the US dollar.
Pending further developments on the 1MDB saga, Sia maintained his year end2016 FBM KLCI target at 1,760 points based on 15 times one-year forward earnings.
“We advocate a defensive stance in larger cap stocks with earnings certainty and rerating catalysts to weather market volatility,” he advised.
1MDB’s default on a US$50.3 million interest payment triggered cross-defaults on two other Islamic notes totalling RM7.4 billion, namely a RM5 billion 1MDB sukuk due 2039 and a RM2.4 billion Bandar Malaysia sukuk due 2021-2024.
1MDB is however seeking waivers from creditors from calling for an event of default and avoid the need for accelerating the notes and sukuk payments.
On this score, MIDF Research noted that pursuant to the sale of 60% equity stake in the Bandar Malaysia project to the consortium of Iskandar Waterfront Holdings (IWH) & China Railway Engineering Corporation (CREC), 1MDB and the consortium intend to transfer the RM2.4 billion Bandar Malaysia Sdn Bhd sukuk to a special purpose vehicle (SPV) which will be owned 60% by the consortium and 40% by 1MDB/MOF Inc. “We expect the sukuk holders to be receptive to the transfer proposal on the credit strength of CREC (AAA-rated local rating) and coupled with the possible emergence of a reputed new shareholder in IWH,” its head of equity Syed Muhammed Kifni said.
Tan Sri Quek Leng Chan is widely speculated to take up a stake in IWH, the master developer of Johor Baru’s waterfront properties.
Despite the knee-jerk equity market reaction to the default of Langat notes, MIDF Research reiterated its FBM KLCI 2016 year-end target of 1,800 points.