Jonathan Rogers, IFR Chief Analyst
IFR 1995 3 August to 9 August 2013
IFR Asia

MALAYSIA’S 1MDB CERTAINLY knows how to pull off a surprise. The strategic development company has no shortage of critics, from Asia’s DCM bankers who have so far missed out on a share of its no-doubt lucrative debt market mandates, to ordinary Malaysians who bought into the opposition’s argument prior to May’s general election that 1MDB lacks transparency.

Previous surprises for the DCM community came in the form of two gargantuan private placements of US dollar bonds totalling US$4.75bn, a combined size that could normally only be achieved through the depth of liquidity available in the offshore public markets.

The size and the private placement approach raised eyebrows, but the fact that all of the business went to Goldman Sachs simply added to the bitterness quotient. Ignoring the fact that few international investment banks can deliver private placements in that size and – I believe it’s fair to say – no Malaysian investment bank can, it just didn’t seem fair play. Not to mention the hundreds of millions of dollars in revenue the US house is rumoured to have walked away with thanks to winning the business.

Last week 1MDB surprised again with an announcement it had signed a memorandum of understanding with the Japan Bank for International Cooperation to engage in discussions about the possibility of 1MDB bringing a JBIC-wrapped Samurai. The reaction to this news was more raised eyebrows, with a few Asia-based bankers pointing out that surely a government-owned entity in A3/A– rated Malaysia wouldn’t need a credit wrap to tap the Samurai market.

That’s not strictly true given the quirky nature of the Samurai investor base, something I have beefed on about before. If you’re after 10-year money in the Samurai market and you’re not a strong Double A rated US or European bank then you can forget about it, as Mexico found out when it approached investors with a 10-year tranche to complement its recent 3s/5s Samurai.

A COLD SHOULDER from investors resulted in the compromise of a six-year tranche being added as the long tenor part of the deal. Still, Mexico’s Baa1/BBB/BBB+ rating held potential buyers in the ultra ratings-sensitive Samurai market back. 1MDB’s last private placement came with an A– rating from S&P. Couldn’t the higher rating and government link propel it over the line in the Samurai market on a standalone basis at 10 years?

That might have been a chance worth taking, given the rarity value of Malaysian credit in the Samurai market, with state-owned oil and gas major Petronas having been the last Malaysian name to tap the Samurai market, way back in 1999.

But that chance was never on the cards. At 1MDB there seems to be a fundamental reluctance to tap the offshore public markets on a standalone basis. The US$1.75bn private placement from last year came with a guarantee from Abu Dhabi’s International Petroleum Investment Corp, while this year’s US$3bn placement was never publicly marketed. Add the JBIC plan and you would have to say that it has quite a penchant for the guarantee.

Perhaps I’m being a tad harsh, since a JBIC wrap is a tried-and-tested first step towards standalone issuance in the Samurai market, as Indonesia and Mexico have shown.

Interestingly, much as DCM originators have griped about the 1MDB Goldman carve-up, foreign investment banks whine about JBIC, which by internal statute grants execution business on its guaranteed yen deals to Japanese houses only. That cosy arrangement is yet another example of the perceived xenophobia that characterises Japan’s capital markets, along with the requirement that Samurai documentation be filed semi-annually in the Japanese language.

WHATEVER THE DEBATE about the soundness of 1MDB’s Samurai plan, there’s no doubting that it’s about more than just the issuance of a bond in Japan. Funds raised via a JBIC guarantee are typically retained in yen and are often used to fund the purchase of goods or services from Japanese companies.

And so when the Samurai MOU was signed in Kuala Lumpur during a Japanese state visit, Japanese Prime Minister Shinzo Abe offered his country’s expertise in high-speed rail, water treatment and medicine to the Malaysian government. So you’re 1MDB and you issue in Samurais and everybody wins.

Let’s hope that everybody includes the Malaysian taxpayer who indirectly will be funding the cost of the JBIC guarantee on 1MDB’s Samurai, should it emerge. And let’s hope that while 1MDB seems nowhere near bringing public market issuance in standalone format, that when it taps the Samurai market it does so at a competitive level versus the implied dollar funding level of the Single A Malaysia offshore curve.

That may go some way to silencing its capital markets critics for the time being. But the company needs adopt the funding mindset of Asia’s frequent issuers if it is to silence them in the long run.