1MDB on the verge of another debt default

(Malaysian Times) – Of course the people of Malaysia at some point will have to shoulder all these debts.

Malaysian state fund 1Malaysia Development Bhd (1MDB) is on the cusp of another debt default. This comes after last month’s default on a US$1.75 billion bond.

The next coupon payment for 1MDB is due on Wednesday (May 11), London time. So by noon on Thursday, if 1MDB refuses or fails to pay for whatever reason, it will once again go into default and trigger a cross-default on its other debts, including RM7.4 billion (US$1.83 billion) worth of sukuk (Islamic bonds).

Even though the notes are guaranteed by the International Petroleum Investment Co (IPIC), chances are that the Abu Dhabi wealth fund will pay, otherwise it will trigger its own cross-default. This could rattle investors’ confidence that has already been shaken by 1MDB that is still being probed in at least six countries for possible fraud and money laundering.

That is why 1MDB is actively engaging its bondholders, first with sukuk holders and now with US-dollar bondholders to assure them that it is not because 1MDB cannot pay. It has ample liquidity to do so, but it is withholding payment because of an ongoing dispute with Abu Dhabi wealth fund IPIC.

While rating agencies like Moody’s and Fitch have said that sovereign risk from 1MDB is limited, market watchers are nevertheless concerned.

Dr Oh Ei Sen, a senior fellow at the Institute of Defence and Strategic Studies at Nanyang Technological University, said: “Essentially, the Ministry of Finance is assuming all its debts. The Ministry of Finance owns 1MDB, it is a government department, a government agency, so of course the people of Malaysia at some point will have to shoulder all these debts.”

Moody’s has so far put the contingent liabilities and explicit guarantee from 1MBD to about 3 per cent of GDP.