Tectonic shift in M’sian politics (2) : 1MDB’s problem?

1MDB can mobilize the cashflow from issuing bond by using collateral, which I don’t think it will use this anymore, or by selling some of there assets. In this case, there are 4 assets of investment project. Or ultimately, 1MDB can mobilize the cashflow from issuing IPO as stated in WSJ as much as $US 1 billion

At the heart of the story regarding the political battle between Najib vs Dr M, we can summarize it into just one question, what’s the problem inside 1MDB?

I’ll try to investigate this issue from the financial perspective.

1MDB’s financial position

I used to misunderstand before: 1MDB is not a sovereign wealth fund (SWF), it’s instead a “strategic development sovereign wealth fund” (SDSWF). Actually Malaysia already has her own SWF, called Khazanah Nasional BHD. (There are several types of SWF, see page 31 on this paper http://www.imf.org/external/pubs/ft/wp/2013/wp1323... and see a comparative study between SWF and Pension fund here http://www.oecd.org/finance/financial-markets/4019... ).

But today, as Dr M said in his blog (http://chedet.cc/?p=1748 ), 1MDB used to be Terengganu’s SWF before (namely Terengganu Investment Authority or TIA) by employing its oil wells as collateral, and securing as much as RM 5 billion bond. Dr M mentioning Jho Low to advise Najib making Federal Government’s guarantee for those bond after Terengganu’s exit. As such, federal government’s guarantee is thus a collateral instead of Terengganu’s oil wells. Which is much more credible in term of finance. Dr M also mentioned Goldman Sachs as underwriter for those RM 5 billion bond, and hence GS could make money from 10% commission as much as RM500 million. While 1MDB must pay interest rate at 5.9%, or almost 7% for whole bond’s value. Which, Dr M raised a question, the government can raise as low as 3% interest rate bond.

By the way, I found that Dr M’s claim is not compatible to another source according to article in Bloomberg. (http://www.bloomberg.com/news/articles/2013-05-08/... )

It seems GS had involved in the three bonds arrangement for 1MDB during 2009 - 2012 for over $US 6.5 billion. GS could earn at 7.7% at face value. 1MDB’s bond seems to be rated below Baa3 by Moody’s Investor Service and at BBB- by S&P. (One step over junk bond.) Which is dubious for me, because Thai Electricity Generating Authority of Thailand (EGAT)’s bond rating by moody’s is at A3. (This bond has been guaranteed by the government.)

Note: There is no report for the federal government's guarantee by Bloomberg.

There is neither information on 1MDB's website regarding bonds and assets, nor the accounting information. (http://1mdb.com.my/faq )

So we have no clear knowledge on the 1MDB’s asset, collateral and debt positioning.

There are compiling of investments on assets by 1MDB as follow:

• JV with PetroSaudi as much as $US 2.5 billion in 2009
• Cooperation with SGCC in SCORE project in 2010
• Reinvestment in Sungai Besi with QIA as much as $US 5 billion in 2010
• JV with Mubadala in TRX project in 2010 (see Mubadala’s profile here : http://fletcher.tufts.edu/~/media/Fletcher/Microsi...

There is a report on the repayment of $US 975 million loan to Deutsche Bank (http://www.themalaysianinsider.com/malaysia/articl... ) by Abu Dhabi’s IPIC and Aabar’s injection of $US 1 billion. It’s not obvious that this is either a loan or an investment. If it’s a loan, this can be considered as another kind of debt renewal.

I’ve masked the star (*) on the chart at the claims by Dr M which is not quite clear or is not compatible with other reports.

1MDB’s exit plan

It seems (from the bond’s rating), that the federal government has relaxed their guarantor out of 1MDB’s bonds. That’s why 1MDB’s bond has very high cost of money (compared to the government). But the point is if 1MDB would go bankrupt, the federal government’s money will not be burdened by this debt. By the way, this needs to be rechecked again. (This kind of loan needs to be responsible by the federal government http://www.themalaysianinsider.com/malaysia/articl... )

The money, or more precisely, the cashflow is not a problem as long as 1MDB can continue issue the bond, or doing debt renewal like in Deutsche Bank case.

1MDB can mobilize the cashflow from issuing bond by using collateral, which I don’t think it will use this anymore, or by selling some of their assets. In this case, there are 4 assets of investment project.

Or ultimately, 1MDB can mobilize the cashflow from issuing IPO as stated in WSJ as much as $US 1 billion http://www.wsj.com/articles/SB10001424127887324520...

This is the way to run businesses and making investments.