KL fund’s new loans plan raises eyebrows

Fresh loans mean 1MDB will have long-term liabilities of $6.4 billion by end-2013

KUALA LUMPUR: Malaysia’s secretive sovereign wealth fund is back in the market for fresh loans, and that has bankers and private economists worried.
1Malaysia Development Berhad (1MDB), which raised RM5 billion (S$2.1 billion) from a bond issue just over a year ago, is proposing to tap the Malaysian banking system for another RM5 billion in loans.
Bankers familiar with 1MDB’s funding plans said that the new loans will not be guaranteed by the Malaysian government but will be settled within three years through a separate issue of state- backed bonds, a fund-raising exercise in which the wealth fund is hoping to raise another RM10 billion. 
That means that by the end of 2013, 1MDB will have long-term liabilities of RM15 billion. 
In written responses to queries from The Straits Times, 1MDB’s chief executive officer Shahrol Halmi said that 1MDB has approached seven domestic financial institutions to raise a bridging loan facility for RM5 billion over the next three years. He noted that the “funds sought are not meant for immediate draw down”.
“We have not exhausted our earlier funding. This is a preparatory step to enable us to act swiftly once our proposed projects are set to go,” he said, without identifying the projects 1MDB is pursuing.
But several Malaysian bankers who have reviewed 1MDB’s request for fresh funding said that the fund’s heavily leveraged business model is worrying.
“The model of relying almost entirely on borrowed funds isn’t sustainable,” said one chief executive of a Malaysian bank, who added that the absence of a government guarantee for the new bridging loan would force lending institutions to seek other safeguards before participating in 1MDB’s fund-raising exercise. 
“It would be difficult to be part of a funding exercise this large without some form of government guarantees,” said another senior Kuala Lumpur- based banker familiar with 1MDB’s plans.
1MDB’s activities are also starting to draw scrutiny from Malaysia’s opposition politicians.
Opposition leader Anwar Ibrahim, who is also a former Malaysian finance minister, said that 1MDB’s aggressive fund-raising strategy could turn into a financial debacle that would dwarf other scandals such as the Port Klang Free Trade Zone project, which has exposed the Malaysian government to several billion dollars of debt due to rampant mismanagement and alleged fraud. 
In a recent statement, he said that the roughly RM15 billion in long-term liabilities 1MDB will have in its books by 2013 under its fund-raising plans will mean that the state agency will have “four times the value of bonds issued by Port Klang Free Trade Zone which amounted to RM3.7 billion”.
1MDB launched its sovereign wealth fund after it raised RM5 billion in May last year through a 30-year bond issue. 
The fund currently forks out about RM280 million annually in interest payments on the first bond issue. Assuming the proposed RM10 billion bond issue in 2013 carries the similar annual interest rate of 5.75 per cent, the sovereign wealth fund will need to stump out more than RM840 million each year to its bond holders.
1MDB is the brainchild of Prime Minister Najib Razak. He had originally envisaged setting up a RM10 billion fund for Terengganu, the country’s top oil and gas producing state, and tapped Malaysian business executive Taek Jho Low to lay the groundwork for the fund.
1MDB officials said that Mr Low – who recently shot to fame for his partying with Hollywood celebrities such as Paris Hilton and R&B singer Usher at New York nightspots – was involved in the initial stages of the fund, which was called the Terengganu Investment Authority, or TIA. 
But that plan came under fire from Terengganu state government officials, prompting Datuk Seri Najib to create a slightly smaller fund and rename TIA as 1MDB.
1MDB has been touted as the government’s latest initiative to draw foreign investment into the country. But the sovereign wealth fund has little to show in the form of foreign inflows.
The fund’s only investment to date is the purchase last year of a stake in an oil joint venture for RM3.5 billion.
Little is known of PetroSaudi, which is reported to have interests in oil and gas fields in the Caspian Sea. Bankers said the investment is risky because 1MDB has committed 70 per cent of the fund’s entire working capital to one single asset.
1MDB declined to comment on its investment in PetroSaudi.
Bankers tracking developments at 1MDB are also puzzled over the fund’s reporting of its financial position. 
For example, 1MDB’s unaudited balance sheet at end-March declared that its liability arising from its first bond issue amounted to RM4.39 billion. 
It is unclear how 1MDB’s treats its liabilities in its accounts, but bankers said that the figure should show the face value of the bond.
1MDB officials declined to comment on the differential of roughly over RM600 million.
The fund also declined to comment on how it generated profits of RM121.8 million at end-March on revenues of RM439.8 million, according to financial statements provided by 1MDB to the Malaysian banks.
ljlopez@sph.com.sg