24th May 2016
SINGAPORE • The fortunes of bonds in Malaysia’s troubled investment fund 1MDB are diverging this month: Those guaranteed by Abu Dhabi’s sovereign wealth fund have rallied, while notes with support from Malaysia’s own government have dropped.
Its 4.4 per cent 2023 notes, backed by a letter of support from Malaysia’s government, slumped 6.4 per cent in May, set for the worst slide in 16 months. The fund’s 5.99 per cent 2022 bonds, on which Abu Dhabi’s International Petroleum Investment Co (IPIC) paid interest earlier this month in its role as guarantor, gained 1.9 per cent, the most since at least September 2014.
The contrast reflects growing investor concern about the Malaysian government’s backing as it grapples with an economy forecast to expand at its slowest pace in seven years amid a collapse in oil prices. 1MDB is at the centre of multiple investigations from Switzerland to the US amid allegations of money laundering and embezzlement.
Even as the firm has consistently denied wrongdoing, it has brought negative attention to the government.
“In the past, people could just look at the support as enough,” said Dr Sean Chang, head of Asian debt investment at Baring Asset Management in Hong Kong. “But now, the macro picture is very different. Malaysia is a commodity exporter and if this kind of market environment persists, it may not do them a favour. A straight guarantee is more clear-cut and people are happy to hold on to those exposures.”
With another coupon due this month, 1MDB referred requests for comments on its interest payment plans to previous statements it had made on the matter.
The company said on April 26 that “it will meet all of its other existing financial obligations and has ample liquidity to do so”.
The finance ministry reiterated on May 11 that it will “continue to fulfill all of its outstanding financial commitments, including any explicitly guaranteed debt and debt which carries a government letter of support, to domestic and international investors.”
1MDB itself did not make payments on two IPIC-guaranteed bonds in the past month because of a dispute with the Abu Dhabi sovereign wealth fund. On April 25, the fund defaulted on a US$1.75 billion (S$2.4 billion) privately placed bond, missing a US$50 million interest payment. IPIC, which was also co-guarantor on those notes, said it would make the payment only if the Malaysian fund first failed to do so.