Opaque fund faces default, uncertain future

Babu Das Augustine, Banking Editor
Gulf News, Abu Dhabi
April 20, 2016

Massive debt burden seen impacting bond pricing

Dubai: Scandal-hit Malaysian government-owned fund 1Malaysia Development Berhad (1MDB) began as Terengganu Investment Authority (TIA) in 2008, a sovereign wealth fund aimed at ensuring economic development for the state of Terengganu. It was renamed 1Malaysia Development Berhad on January 2009 and made a federal sovereign fund in 2009.

The entity focuses on strategic development projects in the areas of energy, real estate, tourism and agribusiness. The 1MDB fund was founded to invest in new industries and attract foreign investment. While little of that investment occurred, the fund rolled up almost $13 billion (Dh47 billion) in debt, a big chunk from dollar-bond issuances, which today it is having trouble repaying.

While the company faced allegations of lack of transparency in its dealings there have been allegations that Malaysian Prime Minister Najib Razak and his associates benefited from various international and domestic deals.

In a report Wall Street Journal said that 1MDB made overpriced purchases of power assets in Malaysia through Genting Group in 2012. Genting then allegedly donated this money to a foundation controlled by Razak, who used these funds for campaign purposes during the 2013 general elections.

Further allegations were made by the Wall Street Journal that $700 million was transferred from 1MDB and deposited in AmBank and Affin Bank accounts under Razak’s name.

In February 2016, US Federal Bureau of Investigation began probing the connection between a regional top executive of global investment bank Goldman Sachs to Razak and the nature of the former’s involvement in multibillion dollar deals with 1MDB. In addition to these, investigations are under way in Malaysia, Switzerland, Singapore, Hong Kong, Australia, Luxembourg and UK.

Buckling under debt burden, 1MDB has reportedly defaulted on a debt obligation, adding to the mountain of woes the state fund faces. According to a London Stock Exchange filing by Abu Dhabi’s International Petroleum Investment Co (IPIC), 1MDB and Malaysia’s finance ministry “are in default” of $1.1 billion.

The development leaves 1MDB’s bondholders waiting for an interest payment that was due on Monday. The Abu Dhabi fund indicated it no longer has an obligation to make the interest payments, and 1MDB didn’t say if it would step in. Malaysia’s finance ministry said in a statement that it “will continue to honour all of its outstanding commitments.” The conflict with IPIC comes as Malaysia plans to sell as much as $1.5 billion of global Islamic bonds. The marketing of the notes started last week and would likely have maturities of 10 and 30 years, according to two people familiar with the matter.

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