Surging debt at Malaysia’s shadowy fund emerges as new sovereign risk

By admin-s Last updated Jun 2, 2014

(Reuters) – Lurking beneath Malaysia’s solid investment-grade sovereign rating is a risk posed by a $14 billion investment fund that is not even generating enough cash from operations to cover interest costs.

Regarded as a cross between a sovereign wealth fund and a private investment vehicle, with Prime Minister Najib Razak chairing its advisory board, 1Malaysia Development Berhad (1MDB) is struggling under the burden of $11 billion in borrowed money.

The government says it only guarantees around 14 percent of the debt. The investment community assumes it would provide more if needed, and it is the potential strain on Malaysia’s debt position from these contingent liabilities that raises concern.

“We don’t know how well 1MDB is doing,” said Christian de Guzman, senior analyst of sovereign risk group at ratings agency Moody’s Investors Service. “It does pose a risk in terms of the amount of borrowing they have made over the past few years.”

Controversy has dogged 1MDB almost since it was first set up months after Najib came to power in 2009, and used for funding projects that form part of his Economic Transformation Program.

Critics have questioned its investment choices, the size of its debt, $2.25 billion parked in a Cayman Island fund, hundreds of millions of dollars of revenue earned by Goldman Sachs for handling its bond issues, delays in its accounts, changes of auditors, and a perceived lack of transparency.

A $1.9 billion bridging loan that fell due in November has been rolled over twice, most recently two weeks ago, in order to give 1MDB more time to launch a $2 billion initial public offering that would reduce debt incurred buying 15 power plants. In a statement published on May 23, 1MDB said the IPO for its power division will take place in the second half of this year.

In 2013, 1MDB, with liabilities of more than $13 billion, generated cash flow of 860 million Malaysian ringgit ($267.75 million) from operations, far below the annual interest outgo of 1.62 billion. It would have made a 1.85 billion ringgit loss, but for a 2.7 billion ringgit revaluation of its property portfolio. (link.reuters.com/vuc59v)

Opposition leader Anwar Ibrahim was quoted at a news conference in late April warning; “If we continue with this culture of accumulating debts, Najib’s 1MDB will fail and become a liability that should be called 1Malaysia’s Debt of Billions.”

The Prime Minister’s Office and 1MDB did not respond to Reuters’ requests for comment.

1MDB defended itself in a statement released in February, saying that its power assets had strong growth potential.

“All this points to a high value proposition that can be expected to stimulate markets and bring significant FDI and cash profits to the shareholder – the Government of Malaysia,” it said.

TRIGGERS

But independent analysts also have voiced concern that 1MDB’s debts could be pushing Malaysia into risky territory.

“1MDB remains somewhat of an enigma,” Bank of America Merrill Lynch economist Chua Hak Bin said in a note. “What stands out, however, is 1MDB’s high leverage, which has raised concerns that 1MDB could emerge as a serious contingent liability for the government.”