1MDB mess clouds Petronas US$7 billion debt proposal

A Petronas petrol station is pictured in front of the Petronas Twin Towers in Kuala Lumpur. Malaysia's national oil company is paying for troubles at state investment fund 1MDB. -- PHOTO: BLOOMBERG
A Petronas petrol station is pictured in front of the Petronas Twin Towers in Kuala Lumpur. Malaysia's national oil company is paying for troubles at state investment fund 1MDB. -- PHOTO: BLOOMBERG

SINGAPORE - Malaysia's national oil company Petroliam Nasional Bhd is paying for troubles at a state investment fund.

The yield premium on Petronas's 2022 U.S. dollar-denominated debt over Treasuries has surged 53 basis points in the last six months after the government said it wasn't liable for 1Malaysia Development Bhd's (1MDB) debt and the fund missed a loan payment. That was unfortunate timing for Petronas, which is planning its first dollar bond in five years to raise as much as US$7 billion (S$9.5 billion), according to people familiar with the matter.

The cost of insuring Malaysian sovereign debt reached a 16- month high on Jan. 13, one week after local media reported 1MDB's missed payment, and is up 27 basis points since Dec. 31. Fitch Ratings said last month it may downgrade Asia's only net crude exporter, citing plunging oil prices and "uncertainty" surrounding finances of the investment fund, whose advisory board is headed by Prime Minister Najib Razak.

"The 1MDB mess is being factored into the spreads for Malaysia and there aren't that many bonds in which you can express that view," said Dilip Parameswaran, the Hong Kong- based head of independent advisory firm Asia Investment Advisors Ltd. "That, mixed with lower oil prices and a potential downgrade of the sovereign, are all weighing on Petronas."

Petronas's sale of dollar-denominated Islamic bonds may become its biggest such offer to date. It's working with Bank of America, CIMB and Deutsche Bank to lead the offering, said the people familiar, who asked not to be identified because the details are confidential.

The last time Petronas sold dollar notes was in August 2009, when it issued US$4.5 billion of bonds. Fitch gives Petronas an A rating with a negative outlook, one level higher than Malaysia's A- grade. Earlier this week, Malaysia named Wan Zulkiflee Wan Ariffin, a company veteran, to lead the oil producer, handing him the job of dealing with the slump in crude prices that's eating into government revenue.

Natural gas futures dropped to US$2.58 per million British thermal units on Feb. 6, the lowest since 2012, while the price of Brent futures is down 49 per cent since June. Petronas derived 21 per cent of its revenue from gas and an equal amount from crude, with petroleum products being the biggest contributor to its top line, according to its 2013 annual results.

"There has been some noise around the 1MDB situation and there are talks about what happens to the dividend now," said Vikas Halan, the Moody's Investors Service analyst in Singapore who follows the company. "And in addition to oil prices, liquid natural gas is down too."

About 30 per cent of the government's RM225 billion revenue in 2014 was oil related, including a RM29 billion dividend from Petronas, according to the finance ministry. Petronas reported RM119.4 billion of cash at the end of the third quarter, compared with RM78 billion of total debt maturing within one year.

1MDB has its origins in Terengganu Investment Authority, which was created in 2009 to invest oil royalties from the state of Terengganu. When Najib became prime minister that year, it was renamed 1MDB, became a national entity and its funding source became government-backed debt instead of oil income.

In response to questions from opposition lawmakers, the government said Oct. 29 that it wasn't liable for 1MDB's debts if the company went bankrupt.

The Malaysian Insider reported on Friday morning that 1MDB had settled a RM2 billion loan on Thursday with money from billionaire T. Ananda Krishnan, six days before bankers triggered a default. Its total debt has been estimated at RM42 billion.