1MDB settles Abu Dhabi debt by selling stakes in firms to China

Workmen at the 1 Malaysia Development Berhad (1MDB) flagship Tun Razak Exchange development in Kuala Lumpur, Malaysia, on March 1, 2015.
Workmen at the 1 Malaysia Development Berhad (1MDB) flagship Tun Razak Exchange development in Kuala Lumpur, Malaysia, on March 1, 2015. PHOTO: REUTERS

State-owned 1Malaysia Development Berhad (1MDB) has made the final settlement of US$602.7 million (S$808 million) in debt obligations to Abu Dhabi's International Petroleum Investment Company (Ipic), by divesting its stake in two companies to buyers linked to Chinese state-owned enterprises.

The payment, the second tranche of a US$1.2 billion loan Ipic extended in July 2015 to 1MDB, was made last Friday, ahead of the end-December deadline that both parties agreed to in April this year.

Ipic confirmed in a statement yesterday that "it has now received all the funds required to be paid to it under the Settlement with the Minister of Finance (Incorporated) Malaysia and 1MDB and the Consent Award made on 9 May 2017".

One Malaysian government official familiar with the settlement said: "The process to pay is being initiated early because the funds are in place and 1MDB wants to avoid any administrative trip-ups that could result from the banking holidays at the end of the year."

The first tranche was settled in August. The second instalment was paid with funds raised from the sale of investments in financial instruments held by the Malaysian investment company and stakes held in two 1MDB-related entities that own tracts of land in the northern Penang state and another 129ha real estate parcel around Port Klang, the sources said.

Malaysian government officials declined to identify the buyers in the real estate transactions but one financial executive close to the situation said that the equity interests in the 1MDB real estate entities were acquired by "concerns ultimately controlled by Chinese state-owned enterprises". The executive declined to elaborate.

1MDB did not respond to requests for comment. In a statement issued yesterday, it said that all funds were paid from proceeds of its ongoing rationalisation programme.

Opposition MP Tony Pua had previously questioned how 1MDB was funding these repayments, and alleged that the Ministry of Finance's refusal to answer indicated that 1MDB had help from the government.

For the first tranche, 1MDB had said in April that it would use investment units owned by 1MDB subsidiary Brazen Sky Limited to fund the payment.

In June, however, the United States Department of Justice (DOJ) said these so-called fund units are "relatively worthless".

The DOJ has filed several lawsuits seeking to seize dozens of properties and luxury assets that it claimed were purchased with funds misappropriated from 1MDB amounting to over US$3.5 billion. The ongoing probe is one of several worldwide relating to 1MDB, including in Singapore, Switzerland and Hong Kong.

The dispute between 1MDB and Ipic revolves around the Ipic loan and another US$3.54 billion in cash advances 1MDB claimed it made to several Abu Dhabi-controlled entities as part of obligations under a May 2012 bond arrangement.

Ipic claimed that it never received the monies from 1MDB, triggering the dispute.

Ipic declared 1MDB in default after the state investment fund refused to honour an interest instalment of US$50.3 million, a move that exposed the Malaysian government to billions more in claims.

Days before the arbitration process was to begin in April this year, both governments reached a settlement.

Under that confidential agreement, sources familiar with the deal said that Malaysia declared that it would honour all its financial obligations to its international bond holders and make full settlement on the US$1.2 billion loan to Ipic before the end of the year.

According to financial executives familiar with the situation, Abu Dhabi will begin negotiations next month with 1MDB regarding the outstanding US$3.5 billion that remains in dispute.

A version of this article appeared in the print edition of The Straits Times on December 28, 2017, with the headline '1MDB settles Abu Dhabi debt by selling stakes in firms to China'. Print Edition | Subscribe