Time for 1MDB to come out in the open

ARCHIVES 2013

By admin-s On Apr 15, 2013

IFR Asia’s Jonathan Rogers suggests latest private placement serves neither transparency nor sensible pricing

So our old friends from Malaysia’s 1MDB are back again, or should I say were back again, since the US$3bn 10-year private placement arranged for the government investment vehicle by Goldman Sachs was closed in conspicuous silence some weeks ago – on March 29 to be precise.

The under-the-radar modus operandi mirrored that seen on the US$1.75bn 10-year private placement Goldman closed for 1MDB last June. As with that deal, the new transaction is likely spark controversy, not just because of the quiet manner in which it was completed but because it comes barely three weeks before Malaysia’s general election on May 5.

That is because Malaysia’s opposition party led by Anwar Ibrahim has called for 1MDB’s abolition as part of its election manifesto, claiming 1MDB, which replaced the former Terengannu sovereign wealth fund in and is a plank of prime minister Najib Razak’s New Economic Policy, duplicates the functions of the country’s pension fund Khazanah Nasional. But beyond that seemingly anodyne policy call, Anwar has claimed that the debt assumed by 1MDB could bankrupt Malaysia.

Meanwhile, various Malaysian commentators have criticised 1MDB for lacking transparency, and it seems likely that the latest transaction will simply add to the noise – if that’s the right word – which surrounds the entity.

THERE IS AN obvious point to be made about the 1MDB private placement, the size of which equates to last week’s US$3bn two-tranche transaction for the Republic of Indonesia, which was the largest G3 public offshore market deal so far this year. Why wasn’t the transaction launched, marketed and distributed like any conventional bond transaction rather than placed privately?

While there are no doubt many deals of hefty size in Asia which could have been placed with one or a handful of investors, issuers take the public route because it best serves their interests.

Not only does canvassing a broad base of investors enable syndicate bankers to discover the optimum price point at which a deal can be successfully placed, but the secondary trading of a well-placed bond will tend in most cases to lower an issuer’s implied cost of term funding. It also opens up a broad investor base which can be called upon in the future to provide funds and secondary market liquidity.

And the bookbuilding process can often uncover hitherto unimagined demand for an issuer’s paper which in turn allows leads to drastically tighten pricing. Not so with a private placement, where demand is uncovered bilaterally or with a handful of investors.

Taking the public route also helps large enterprises build up liquid meaningful yield curves, again, something which the private placement market cannot provide. And when private placement paper finds its way into the secondary market, it inevitably does so via the brokers. It’s not uncommon to see paper crossed for obscenely large skims between a less than clued-up seller and an even less savvy buyer.

The last time around, 1MDB’s paper, which priced at Treasuries plus 425bp, was rumoured to have been shown a few days later to an Asian insurance company at around 200bp inside that level.

None of this does any service whatsoever to the issuer, unless of course the primary aim was simply to get the funds in, whether the source is one investor, or in the case of the latest placement from 1MDB, a handful of investors.