KUALA LUMPUR (BLOOMBERG) - The ringgit dropped the most in two months and stocks were set for the lowest close since mid-March as troubled state investment company 1Malaysia Development Bhd confirmed it's in default after missing an interest payment on bonds.
The company is withholding a US$50 million payment on US$1.75 billion of dollar notes amid a dispute with International Petroleum Investment Co, Abu Dhabi's sovereign wealth fund that is the co-guarantor of the bonds maturing in 2022, according to an e-mailed statement. The deadline was on Monday. The cost to insure Malaysia's government debt rose to the highest level in seven weeks and ringgit yields surged.
"At the margin, this has to be negative for the ringgit," said Nizam Idris, the Singapore-based head of strategy for fixed income and currencies at Macquarie Bank Ltd. "Obviously, contingent liability on the government as well as rating risk is there."
The ringgit declined for a fourth day, its longest run of losses since Nov 2, according to prices from local banks compiled by Bloomberg. It fell 0.9 per cent to 3.9420 per US dollar as of 1:10 pm in Kuala Lumpur, the biggest slide since Feb 19 and taking its drop in April to 0.9 per cent.
Against the Singapore dollar, the ringgit weakened 0.86 per cent to 2.9058 per Singdollar as of 2:38pm from its close of 2.885 on Monday.
"Whilst 1MDB has the funds to have made the interest payment, it is 1MDB's position, as a matter of principle, that it was IPIC's obligation to do so," the company said. "Until IPIC accepts that all obligations have been met, 1MDB is obliged to withhold payments and will seek legal recourse and resolution."
Five-year credit-default swaps climbed four basis points to 167 basis points, prices from Nomura Holdings show. That leaves the measure set for its highest close since March 8, according to data provider CMA.
The price of 1MDB's 4.4 per cent dollar bonds due in 2023 dropped 4 cents on the dollar to 87 cents, Bloomberg-compiled data show. The yield surged 73 basis points to 6.89 per cent. The three-year sovereign note yield climbed five basis points to 3.32 per cent, the steepest increase since Feb 24.
The FTSE Bursa Malaysia KLCI Index of shares retreated 0.7 per cent, which was also the biggest loss in two months.
The missed 1MDB payment triggered cross defaults on RM7.4 billion (S$2.54 billion) of the company's debt, according to the statement. The firm has been in dispute over its debt obligations to IPIC under an agreement reached in May last year. As part of the pact, the wealth fund said then it would assume obligations to pay interest due under $3.5 billion of 1MDB bonds that it guaranteed. IPIC said this month that Malaysia's state fund was in default after failing to pay it more than U$1 billion in connection with a loan.
Standard & Poor's said in a e-mail it doesn't see any impact on Malaysia's A- rating, its fourth-lowest investment-grade ranking, from 1MDB.