1MDB - no more the elephant in the room (pages 27 & 30, TheEdge Malaysia, Dec 22, 2014)
By Ben Shane Lim
For most Malaysians, 1Malaysia Development Bhd (1MDB) has been a complex engima - just one of the many plots and subplots that form the political background noise to everyday life. But the troubling story of the state-owned fund that is Prime Minister Datuk Seri Najib's brainchild finally came to the fore in 2014, with potentially far-reaching implications for the nation's finance and politics.
Opposition politicians and former prime minister Tun Dr Mahathir Mohamad may have their own agendas for criticising 1MDB, but the man in the street has many reasons to be worried as well - about 42 billion and counting.
Even one of Najib's own from Umno broke ranks earlier this month, with Batu Kawan deputy cheif Datuk Seri Khairuddin Abu Hassan lodging a police report against 1MDB, whose advisory board is chaired by Najib himself. Penang Umno members were quick to step in and pacify the party president, stressing that Khairuddin had been acting alone.
Political motives aside, there are justifiable reasons for Malaysians to be concerned as well.
In a nutshell, 1MDB appears to have borrowed a huge amount of money at too high a price to purchase overpriced assets that cannot cover the debts. Why this has happened is open to speculation.
The net effect is that 1MDB has been relying on massive land revaluation gains to book accounting profits, but auffers from negative cashflows as whatever cash it has is used to service the debts. In the financial year ended March 31, 2014 (FY2014), it suffered a negative cash flow of RM2.25 billion.
Ultimately, this business model doesn't appear sustainable, a fact that became more apparent when 1MDB posted a loss of RM665.3 million for FY2014, weighed down by RM2.4 billion in financing costs.
This isn't particularly surpirsing, since 1MDB had relied on over RM2.74 billion in land revaluation to turn a profit in FY2013. But the losses have been a wake-up call for Najib's administration.
There are two linchpins that are supposed to turn 1MDB around - the development of the 70-acre Tun Razak Exchange (TRX) land in the heart of KL and the listing of 1MDB's power assets.
While the development of TRX saw little progress this year, it has been an eventful year for 1MDB's energy unit that aims to list next year and raise over RM9 billion. The listing is crucial to raise money for 1MDB to pay off some of its debts, evidenced by the fact (that) 1MDB is willing to retain 20% stake in the listed company.
So what happended?
1MDB started the year on a sour note, having to change auditors for a second time in four years to Deloitte from KPMG. This in part resulted in 1MDB delaying the lodging of its FY2013 financial results with the Companies Commission of Malaysia (CCM) by over six months.
The 2013 financials revealed that 1MDB had channelled over RM7.18 billion to the Cayman islands. 1MDB claims that the funds were professionally managed by Hong Kong-based Bridge Partners, but little is known about the obscure firm and 1MDB largely kept mum about the funds.
The financials also showed that 1MDB overpaid for the acquisition of its power assets by some RM3.3 billion in the form of goodwill. Recall that 1MDB acquired Genting Sanyen power assets from the Genting group for RM2.3 billion, and the Tanjong Power assets from tycoon Ananda Krishnan for RM8.5 billion.
By March 2013, slightly over a year after the acquisitions, 1MDB would write off RM1.9 billion of that goodwill.
While this was a poor start to 1MDB's planned listing of its power assets, the group has had a wi ndfall year when it comes to securing new projects.
It began when it was awarded Project 3B, a 2,000MW coal-fired power plant project worth RM11 billion, after a close fight with a consortium consisting of YTL Power International Bhd and the Sultan of Johor's SIPP Energy Sdn Bhd.
1MDB would go on to win two more projects on a direct-award basis - a 50MW solar project as well as a 2,000MW combined cycle gas turbine plant in Melaka due in 2021.
Including a few more undisclosed hydroelectric projects in and outside the country as well as a joint venture with Tenaga Nasional Bhd to undertake new projects in Bangladesh, 1MDB went ahead with its plans for list its power assets, aiming to go public in the first quarter next year.
However, this would prove to be extremely challenging for the group, which came under yet another round of scrutiny when its FY2014 financials were filed, revealing losses and negative cahs flow amounting to RM2.25 billion. At this point, the fund's borrowings also expanded to RM42 billion.
1MDB would come under even more pressure when documents revealed that it had paid very expensive fees, around 10%, for US$4.75 billion (RM15.2 billion) worth of borrowings it had raised via Goldman Sachs. This is on top of expensive coupon rates as high as 5.99%, compared with government guaranteed bonds which are typically issued at less than 4%.
Goldman Sachs came out to defend the deal, pointing out that the fees reflected the risk that it had undertaken in raising the money for 1MDB.
Unsurprisingly, opposition politicians took the opportunity to grill Najib about 1MDB in Parliament. After all, he is the minister of finance and his ministry owns 1MDB.
Questions were raised in the media as well as in Parliament over the exposure of the government should 1MDB fail to meet its debt obligations, which in FY2014 totalled a whopping RM2.5 billion. After an initial denial to Parliament, Deputy Finance Minister Datuk Ahmad Maslan would backtrack and finally admit that the government issued a letter of support for 1MDB's debts of around RM5.8 billion.
Of more concern was the fact that 1MDB has had to extend and restructure some RM5 billion worth of borrowings in the form of a bridging loan with Malayan Banking Bhd.
On a more positive note, 1MDB claims that it would be redeeming RM4.26 billion of its funds invested in the Cayman Islands.
The negative publicity was enough to draw out 1MDB's chairman, Tan Sri Lodin Wok Kamaruddin, to address the questions. However, only select media organisations that were controlled by the government were invited to the "press conference" in mid-November.
With all the negative news flow, it isn't surpirsing that 1MDB's soon-to-be-listed energy unit has distanced itself from its parent, changing its name to Edra Global Energy Bhd from 1MDB Energy Group Bhd.
Edra Global has already lodged its draft prospectus with the Securities Commission Malaysia, but it is taking longer than usual for the SC to expose the prospectus as it is constantly being tweaked.
That said, it will still be an uphill battle for Edra Global, which is expected to offer yields of between 2.5% and 3.5% - which are hardly attractive. On top of that, given the size of the issuance in excess of RM9 billion, it may not be tenable to list in the first quarter of next year due to weak market sentiment.
Furthermore, the group even had to delay the issuance of RM8.4 billion worth of sukuk to finance the construction of Jimah East, which is also expected to be delayed.
Nonetheless, the fact remains that 1MDB sorely needs Edra Global to be listed as soon as possible to pare down the group's borrowings - and time is running out.
The recent depreciation in the Ringgit against the US dollar is putting more pressure on the fund, given that it has an estimated US7.4 billion in dollar-denominated debts. As at March 2014, that amounted to RM22.048 billion but has since increased to an estimated RM25.7 billion at the current exchange rate of 3.48 against the dollar.
It remains to be seen how 1MDB will support its ever-growing debts, but a default is certainly in nobody's interest, which would be catastrophic - not only for the many banks that are exposed but also the country's balance sheet and indirectly, every Malaysian's pocket.
Silent and ominous, 1MDB has been much more than a four-letter word that has defined 2014. It could well be the legacy that Najib is remembered for, perhaps not in a way he would have hoped for, unless something quick is done to fix its fundamental problem - debt and asset heavy but lacking in cash flow.
(All rights proprietary and intellectual belong to the abovenamed author and to TheEdge Malaysia, this article was extracted from and re-produced by this blogger without prior written permission on the grounds of public interest and in the interests of academic discussion only and is not to be sold or used in any form or manner for commercial purpose whatsoever).