When Ananda Krishnan, Malaysia’s second-richest man, sold a collection of power plants to a little-known fund called 1MDB in 2012, few outside Southeast Asia’s third-largest economy paid any attention.
But reports that the 76-year-old tycoon, whose fortune is estimated by Forbes at $9.8bn, is close to getting his hands back on some of those assets have catapulted the now heavily indebted state-run 1MDB — or 1Malaysia Development Berhad — into the spotlight.
Set up six years ago, 1MDB has no less a figure than the country’s prime minister, Najib Razak, chairing its advisory board, while Goldman Sachs, the Wall Street bank, has twice arranged multibillion-dollar debt issues for it.
Yet 1MDB can also be seen as a microcosm of the oil and gas-rich country’s vulnerability as oil prices plunge and its currency follows suit. Its balance sheet bears the scars of vast ambitions and politically-inspired dealmaking in the shape of a gaping Rm42bn ($11.8bn) hole.
The scale of that debt burden and concern over its ability to repay it have also sparked fears of wider fallout for what has been one of the most attractive emerging markets in Asia should 1MDB run into deeper trouble.
“Clearly it’s opaque, clearly its debts have risen rapidly and are systemically relevant,” says Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch.
The fund has three times requested and been granted extensions on repayment deadlines for a Rm2bn loan led by Maybank, the country’s biggest bank by assets — part of the Rm6.5bn that 1MDB paid Mr Krishnan for his Tanjung Energy group, the owner of more than 10 power plants in Malaysia and the Middle East.
It has switched auditors at least twice since 2009, prompting questions in parliament from opposition politicians in recent months over its sources of funding.
Now it is pinning its hopes on the proposed deal with Mr Krishnan, which would see him become a key investor in an initial public offering that is expected to raise up to $3bn through the spin-off of the power assets he sold back in 2012.
Often described as a sovereign wealth fund, 1MDB invites comparisons with Khazanah, set up in 1993 to make “strategic investments” for Malaysia’s national development and whose $40bn portfolio includes Malaysia Airlines, which is in the midst of a radical restructuring.
However Arul Kanda, a 38-year-old former banker with Abu Dhabi Commercial Bank who took over as head of 1MDB last month, says 1MDB is “a very different animal”.
While it is owned by the government, it is a “strategic development company” that raises its own capital and is not directly government funded, aside from an early equity funding of Rm1m, he says.
Some of the rest of its initial capital is believed to have come from oil royalties linked to oil rich Terengganu state.
One of its earliest initiatives was a now dismantled $2.5bn joint-venture investment fund with Saudi Arabia for oil and gas and property projects in both countries, from which nothing materialised.
1MDB’s sole assets are the power plants and a handful of land holdings, including a 70-acre site in Kuala Lumpur being developed into a financial centre for the Malaysian capital, known as the Tun Razak Exchange.
Its business is focused on power generation in Malaysia, where it is the second-largest provider by output, but it is also Egypt’s biggest power producer.
Its net debt of Rm42bn, as of its latest published set of full-year accounts on March 31, appears to have been amassed primarily by its land and power purchases.
The fund has borrowed heavily, including a $3.5bn bond issued in two tranches in 2012 arranged by Goldman. A second, $3bn bond also arranged by the US bank in 2013, part of a “strategic partnership” between Malaysia and Abu Dhabi, attracted some controversy over the scale of fees Goldman earned.
Yet while 1MDB says it has Rm51bn in assets — including land and Rm12bn in unspecified “available for sale investments” — there is scant evidence of significant cash flow. Net cash from operations, in its latest financial year, was Rm69m.
1MDB made a full-year loss of Rm665m, largely because of higher financing costs, and had cash and cash equivalents of Rm2.8bn at year-end.
1MDB’s net debt, as of latest full-year accounts
In addition, 1MDB’s returns are largely generated in ringgit, which has depreciated by 11.5 per cent against the US dollar in the past six months.
Mr Najib has said the government explicitly guarantees only Rm5.8bn of 1MDB’s debt — about 14 per cent. Fitch believes 1MDB’s entire debt is not big enough to lead to problems for the wider Malaysian financial system if there were a default.
But the fact the latest debt data are almost a year old means 1MDB is still a concern. “Lack of transparency means there could be other risks out there — other unknown unknowns,” says Mr Colquhoun at Fitch.
That is why investors are closely watching to see whether 1MDB can come to an arrangement with Mr Krishnan that could smooth the way for the power IPO.
Mr Kanda, a graduate of the London School of Economics who has also worked at Barclays Capital, maintains that as 1MDB is a strategic development company, there will “clearly be a mismatch in terms of our need to develop and expand our assets versus the cash that we get in from existing assets”.
1MDB’s loss in latest financial year
The fund is looking to “plug that mismatch through financing [bonds] or asset sales”, he told the Financial Times.
Work is already under way on phase one of the TRX project, and Mr Kanda promises measured progress: “We will only build once there are confirmed tenancies. Our job is to get the assets into a position where we maximise the economic benefit and social benefit to the country prior to monetisation; for example, monetising plots of land in TRX where a developer can come in and plug in.”
Yet bankers say TRX is unlikely to generate much cash in the short term.
In addition, they estimate interest payments on the two Goldman-arranged bonds total about $325m a year. With most of 1MDB’s cash flow denominated in the now-sliding ringgit, that will have become costlier — but not impossible to cover, they add.
Fitch and others nonetheless point to the fact that the Malaysian government issued a “letter of support” for the $3bn bond, which funded an Rm18bn “strategic partnership” launched in 2013 with Abu Dhabi state investment vehicle Aabar. No projects have yet emerged publicly.
Critics of 1MDB, its borrowing policy and its opacity say it is a cautionary tale for investors in corporate Malaysia.
“What this tells you is that Malaysia operates on two levels. On the one hand [companies] follow all the rules about transparency but if the company is politically aligned then there are no rules,” says James Chin, director of the Asia Institute at the University of Tasmania.
Mr Kanda hits back at critics, saying the contingent liability associated with the $3bn bond issue “has never been hidden”.
“These are public bonds that carry the government letter of support. If you take those [debt] instruments to their logical conclusion, should the company not be able to pay then, yes, there is a contingent claim on the government. But this is a fact, it’s nothing secret, it’s nothing hidden, it’s in full public view,” he says.
Mr Kanda, has launched a “strategic review” of 1MDB “in terms of the strategic direction, the balance sheet, the debt and asset profile.”
Ultimately, Mr Chin suggests, 1MDB could be shrunk or wound down through sales of assets: “There is no way they can keep it as it is in the long run,” he says.
This article has been amended to correct the power assets acquisition date and the figures for net debt and full-year loss.
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