1MDB dispute intensifies as Abu Dhabi ends relationship

Jeevan Vasagar in Singapore
Financial Times
April 18, 2016

The dispute between an Abu Dhabi sovereign fund and Malaysia’s troubled state fund 1MDB over more than $1bn in missing payments intensified on Monday when the emirates investment vehicle said its Malaysian counterpart was “in default” on an agreement between the two and terminated the deal.

The Gulf emirate’s International Petroleum Investment Company (Ipic) ended its relationship with its Southeast Asian counterpart in a filing to the London Stock Exchange on Monday.The Abu Dhabi fund said 1MDB and Malaysia’s ministry of finance were in default on the deal, including an obligation to pay $1.1bn plus interest, and that 1MDB continued to be bound by its commitments under the agreement.

The dispute relates to a pair of 1MDB bond issues in 2012, which were guaranteed by Ipic. The two funds entered into an agreement last year in which Ipic provided a $1bn cash bailout and agreed to make interest payments on the bonds. In return 1MDB agreed to transfer assets to Ipic.

Ipic was now considering options to remedy the alleged default, including referring the matter to the appropriate dispute resolution forum, it added in its regulatory filing. The move is the latest twist in an affair that has buffeted Malaysia’s government and prompted investigations in at least five countries including the US and Switzerland.

Swiss authorities, who say they have found “serious indications” that about $4bn has been misappropriated from Malaysian state companies, widened their investigation last week to look at the roles of two former officials with responsibility for Abu Dhabi sovereign funds.

For its part, 1MDB said in a that interest was payable on Monday on its $1.75bn 2022 bonds. The Malaysian fund said that a “dispute has recently arisen” between the two funds and that Ipic had not paid the interest.

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The 1MDB statement went on: “1MDB wishes to make clear that it and its group entities will meet all of their other obligations under any other financing arrangements and have ample liquidity to do so.”

Malaysia’s finance ministry said in a statement on Monday that it would “continue to honour all of its outstanding commitments in the financial markets”.

Christian de Guzman, a credit analyst at Moody’s in Singapore, said: “There’s a lot of uncertainty about what’s going on, but one thing is clear — progress on 1MDB’s debt rationalisation has been cast into doubt.”

Bankers in Kuala Lumpur say that while the alleged default is unlikely to threaten Malaysia’s sovereign rating, as the risk from 1MDB is already factored in, it will hamper efforts to contain the political scandal around the affair.

Najib Razak, Malaysia’s prime minister, who heads 1MDB’s advisory board, has battled allegations centred on $681m transferred to his personal bank account, which critics claim is linked to 1MDB. Both Mr Najib and 1MDB deny wrongdoing and the prime minister has been cleared by Malaysia’s attorney-general.

Nazir Razak, Mr Najib’s brother, announced on Monday that he was taking a voluntary leave of absence from his role as chairman of CIMB, Malaysia’s second-biggest bank by assets, while a review took place into transfers into his own personal account. The move follows reports that he received $7m ahead of the 2013 elections in Malaysia.

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The bank chairman said at a press conference that he had done nothing illegal. “My brother asked for some help and I agreed after I assessed that it would not involve anything illegal or misusing my position at CIMB, or any inappropriate use of CIMB resources,” he said.

1MDB has said it has paid about $1.4bn to Ipic but this has not been recorded as having been received on Ipic’s financial statements.

Ipic and its Aabar subsidiary issued a London Stock Exchange statement last week in which they denied ownership of Aabar Investments PJS Ltd, a company that received billions of dollars in payments from 1MDB.

Ipic and Aabar said in the filing that they were aware of reports that “substantial payments” were made to that company, which is incorporated in the British Virgin Islands. They also said they had received no payments from the company and received no liabilities on its behalf.

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