KUALA LUMPUR: Malaysia's RM5 billion (S$2 billion) sovereign wealth fund has raised eyebrows over its investment moves but its top man dismisses such concerns as misplaced.
Called 1Malaysia Development Berhad (1MDB), the fund is touted as Prime Minister Najib Razak's main vehicle to channel much-needed foreign direct investment to the economy.
But bankers and several senior Malaysian government officials have privately raised concerns over the business model of 1MDB, which relies fully on borrowed funds to drive its investments.
Its first major investment - the purchase of a stake in an oil joint venture for RM3.5 billion, or roughly US$1 billion (S$1.4 billion) - is also being seen by some as risky because it has committed 70 per cent of the fund's working capital to a single asset.
But 1MDB's chief, Mr Shahrol Halmi, said the concerns were misplaced.
In a written response to The Straits Times, Mr Shahrol, the fund's managing director and chief executive officer, said the fund was unique in that it creates business opportunities and forges global partnerships to bring home foreign direct investment for new high-impact growth.
The 1MDB was originally conceived as a fund for Terengganu. Datuk Seri Najib had envisaged setting up a RM10 billion fund for the east coast state, the country's top oil and gas producing region.
Mr Shahrol confirmed that a financial executive, Mr Low Taek Jho, who has since attracted media attention, was involved in the initial stages of the setting up of this Terengganu Investment Authority. (See other story on page.)
Sources said, however, that the proposed fund was opposed by some in the Terengganu state government because of the big annual payouts to bondholders that the state would have had to make.
A government official who spoke on condition of anonymity said Mr Najib then decided to set up a smaller fund, 1MDB, to be managed by the federal government.
Still, some bankers are concerned about the initiative.
"The fund will need to register very strong returns to just repay the annual interest charges on its borrowings," said a senior banker at a Malaysian financial institution who has been tracking developments at 1MDB very closely.
In his letter, Mr Shahrol said 1MDB issued RM5 billion worth of 30-year maturity bonds at a coupon rate of 5.75 per cent. He did not identify the arrangers of the bond issue.
Bankers, commenting on the bonds' interest rate, say it could have been lower as they were guaranteed by the government.
They also note that Malayan Banking and CIMB, two of the largest Malaysian banks, were not invited to participate in the bond offering.
Asked to comment, Mr Shahrol said the selection of banks was based on the recommendation of world-class international advisers and consultants, and the commitments and commercial terms from the banks.
Mr Shahrol said the benchmarking of the financial instruments issued by 1MDB was at the optimal rate at the prevailing time. The bonds were arranged in accordance with "normal practice and accepted market practices" regulated by Bank Negara, the central bank, he added.
Kuala Lumpur-based financial executives say the fund's biggest challenge lies in meeting its annual commitments to the unidentified bond-holders. The sum works out to RM287.5 million annually, based on the 5.75 per cent coupon rate.
The joint venture that 1MDB committed roughly 70 per cent of its capital to is PetroSaudi International, a company that Mr Shahrol said is owned by the royal family of Saudi Arabia.
He said 1MDB's investment in the US$2.5 billion joint-venture company will spearhead the flow of foreign direct investments from the Middle East as well as make strategic investments in high-impact projects in Malaysia.
The investment came on the heels of the resignation of 1MDB's chairman, Datuk Bakke Salleh, last month. Datuk Bakke, a financial executive who heads agriculture agency Felda Holdings, had been handpicked by Mr Najib for the post. Mr Bakke did not respond to requests for comment.
On speculation that Mr Bakke resigned because of issues over the PetroSaudi investment, Mr Shahrol replied that "professionals in government-linked companies and funds at the CEO level were tapped to provide expertise" in the setting up of 1MDB.
"They agreed to assist with an understanding that they could return to their core focus areas - managing the companies they head - once their tasks are completed. As 1MDB forges ahead, the board will see new faces progressively," Mr Shahrol added.
ljlopez@sph.com.sg