Now, Ahmad Maslan says Putrajaya will step in if 1MDB defaults

By admin-s On Nov 12, 2014

(TMI) – In another about-turn, Deputy Finance Minister Datuk Ahmad Maslan has conceded that the federal government will step in to meet the US$3 billion (RM10.02 billion) obligations of 1Malaysia Development Bhd (1MDB) under the letter of support it gave.

He said this in a text message reply to a question posed by The Edge Financial Daily yesterday on what Section 3 of the letter of support meant.

Ahmad, however, said this will happen only if 1MDB itself has made all efforts, including restructuring, to raise money to pay its debt but is still unable to do so.

He also explained that unlike a normal guarantee, obligations of the government via a letter of support are not listed as a contingent liability of Putrajaya.

“The key difference between a guarantee and a LOS (letter of support) is that firstly, government explicit guarantee will mean it is contingent on the government’s balance sheet whereas a LOS is not contingent as it is implicit.

“Secondly, an explicit guarantee will mean that borrowers have a direct claim to the government in the event that 1MDB defaults,” Ahmad wrote.

“In LOS scenario, borrowers will have to wait for 1MDB to restructure its assets to remedy the default and only when the assets (RM51.41 billion) are not sufficient to cover, only then the government will step in,” he added.

Ahmad came under fire in the Parliament last week when he said the government did not provide the LOS for the US$3 billion loans that 1MDB Global Investments Ltd, a wholly-owned subsidary of 1MDB, has borrowed.

The deputy minister, however, on Monday admitted that the government had issued the LOS to 1MDB for its loans. However, he insisted that it was not tantamount to a guarantee.

In a legal opinion by Tommy Thomas, a prominent lawyer specialising in corporate litigation and insolvency, and commercial and public law, the key issue in its interpretation is whether the parties intended the LOS to have legal effect.

In answering this issue, one has to inquire whether the government is undertaking legal obligations and, conversely, whether the beneficiaries of the LOS viz, the other three parties and all the creditors, possess legal rights. In other words, can these beneficiaries sue the government if the latter breaches the LOS?

According to Thomas, the following statements in the LOS “plainly and obviously establish that the government is undertaking legal obligations”: