Bandar Malaysia conundrum

Rm2bil bond a sticking point in negotiations

STICKY issues surrounding a Rm2bil bond issued by Bandar Malaysia Sdn Bhd when it was under the purview of 1Malaysia Development Bhd (1MDB) are said to be the main point of negotiations between the government and its prospective new controlling shareholders.

In the recently announced Budget 2020, Finance Minister Lim Guan Eng had stated that the government was selling Bandar Malaysia and negotiations were still ongoing.

His statement on Bandar Malaysia broke a long silence on the status of the project since it was revived in April this year.

In an announcement that surprised many, the government went into a deal with the 60:40 consortium of Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (M) Sdn Bhd (CREC) for the sale of the development project for Rm7.41bil.

The JV company was the master developer for the mega project back then but the Ministry of Finance Inc, then helmed by the previous administration, terminated the agreement in May 2017.

TRX City Bhd, an entity under the Finance Ministry, announced that it had terminated the share sale agreement for the development of the 197ha plot because IWH-CREC as the prime mover, failed to meet the payment obligations despite being granted repeated extensions.

The JV had already paid Rm741mil to the government by then, which was a 10% deposit for the consideration of the 60% stake in Bandar Malaysia. The amount was returned to IWH-CREC in the same month of the termination.

The Finance Ministry had entered into an agreement to sell a 60% stake in Bandar Malaysia to the JV back in December 2015.

So when the Prime Minister’s Office (PMO) under the Pakatan Harapan rule reinstated the project in April this year, the additional condition imposed by the present administration compared to the previous regime was for IWH-CREC to fork out an additional Rm500mil as down payment, on top of the Rm741mil deposit.

Added together, the new deposit sum for the 60% stake is Rm1.24bil.

Since April, there has been mounting speculations of a formal signing between the government and IWH-CREC to firm up the project. However there was no news until the brief update by Lim in the Budget 2020.

It is learnt that the government had appointed consultants to advise it on the sale and the position of its 40% stake in Bandar Malaysia.

According to sources, there is a view that the government should dispose its entire stake due to possible future financial obligations of Bandar Malaysia.

“Apart from development cost, Bandar Malaysia also carries more than Rm2bil worth of bond issues when it was under 1MDB.

“The bond was raised to fund the relocation of the army and air force base in Sungai Besi,” sources said.

It is believed that not all the money was used for the relocation purpose as not much work were done.

To recap, Rm2.4bil was raised from a sukuk placement by Bandar Malaysia Sdn Bhd in 2014. The Islamic bonds, which ranges from one to ten years, were issued through private placement to unnamed buyers. The debt-ridden 1MDB said in 2016 that the proceeds raised were used to partly finance the relocation of the Sungai Besi Air Force Base, pre-funding the fees and expenses of the sukuk programme, to fund the requisite financing reserve accounts and for working capital of 1MDB Real Estate Sdn Bhd (1MDB RE).

Bandar Malaysia itself, is stuck with the obligation of repaying the bonds when it becomes due so the contentious issue now is, will the government be able to fulfill its 40% portion of the obligation?

Will the returns, also be sufficient and on time for IWH-CREC to satisfy its 60% obligation of the bonds?

The government will have to make good with any possible cash call and fork out money for its 40% if it intends to retain the stake.

An alternative is for the government to let IWH-CREC handle everything and not to own any stake.

The recent Budget 2020 speech, saw Lim mentioning that the government decided to proceed with the project having negotiated better terms for the government.

“The project will now include a People’s Park, with an additional 5,000 units of affordable homes and greater Bumiputera participation throughout the project.

“The proceeds from the project will be valued and announced in due course and will be utilised to reduce the debts of 1MDB,” he said in his speech last week.

CREC is state-owned while “helicopter man” Tan Sri Lim Kang Hoo has a 63% shareholding in IWH. The remaining 37% is held by Kumpulan Prasarana Rakyat Johor Sdn Bhd. IWH in turn, owns 37.72% in Iskandar Waterfront City Bhd, which is linked to Lim. Iskandar Waterfront’s share price has jumped 8.02% since the Budget 2020 announcement last week to close at 88.5 sen yesterday.