Malaysia state firm 1MDB's new chief has clear-cut to-do list: Slash debt, list assets

KUALA LUMPUR (Reuters) - In his first week on the job, the new head of loss-making Malaysian state investor 1MDB has had a ringside view of his future challenges: a missed loan payment that spooked bond and currency markets, and a possible delay in an ambitious asset sale he must pull off to cut a debt pile of nearly $12 billion.

Former Gulf-based banker Arul Kanda also began work this week knowing success or failure could affect the man who chairs the fund's advisory board, Prime Minister Najib Razak. With Najib at the helm, 1MDB's expensive acquisitions of power plants it now wants to sell have left it servicing growing debt costs that have squeezed it into the red.

With influential opposition politician Tony Pua dubbing 1MDB"a ticking time bomb", analysts say a deeper liquidity crisis at the state firm could place strain on Malaysia's debt ratings.

The firm's finance costs jumped by half in the 12 months ended March 2014, tipping the firm into a RM665.4 million Malaysian loss.

That has brought fresh urgency to 1MDB's plans to spin off power plants assets in an initial public offering worth about US$3 billion, possibly Southeast Asia's fifth-biggest IPO ever, according to Thomson Reuters data. Already long-delayed, the sale is not now expected until the second quarter as Kanda works on overhauling the firm, and convincing potential investors.

"My mandate at 1MDB includes undertaking a strategic review of the business," Kanda told Reuters earlier this week in an emailed response to questions, without saying whether any areas of the firm's operations will be a specific focus for the review. "As part of this, I will be undertaking a thorough and analytical examination of the business and our operations."

1MDB officials said Kanda couldn't answer questions on plans for the IPO, nor the firm's failure to repay a RM2 billion bridge loan that was due end-December. 1MDB is now exploring ways to settle the payment to Malaysian lenders by Jan. 30, people close to the matter told Reuters this week.

Resolving the firm's debt quagmire has become more pressing for Prime Minister Najib and Kanda, a lawyer by training and an expert on restructuring. Bank of America Merrill Lynch economists said in a report last month Malaysia faces the risk of a "double miss" on both economic growth and fiscal deficit as oil-related revenue could come in 40 per cent below the government's projection.

News of the missed loan repayment pushed spreads on 1MDB's bonds due 2023 to the widest level since March 2013. Foreign exchange traders said it also played a part in squeezing the ringgit to a 5 1/2 year low earlier this week.

"You are still talking about a state investment vehicle that is very much in the spotlight for pretty much all the wrong reasons," Christian de Guzman, a senior analyst, sovereign risk group at Moody's Investors Service. "There is a question about 1MDB's much larger liabilities,"he said, adding the rating agency sees 1MDB as a contingent risk to the Malaysian government's balance sheet.

The government says it only guarantees RM5.8 billion of 1MDB's debt or about 14 per cent of its total borrowings, a potential bailout will make the fund a risk for the country's sovereign rating.

Malaysia's opposition wants 1MDB to open its books for scrutiny to explain dealings such as high fees paid to Goldman Sachs for handling bond sales and funds parked in the Cayman Island.

"I don't think the (liabilities) will necessitate immediate injection of a bailout, maybe one or two bonds, if they keep falling on their repayment, my bigger concern is the indirect bailout," said Rafizi Ramli, vice president and secretary general of the opposition party Parti Keadilan Rakyat.