Chinese firms dangle lifeline for 1MDB, SRC

Readiness to bail them out is part of plan to bag KL-S'pore rail deal: Analysts

Men walk past a 1 Malaysia Development Berhad (1MDB) billboard at the fund's flagship Tun Razak Exchange development in Kuala Lumpur. PHOTO: REUTERS

A prime piece of property owned by controversial state fund 1Malaysia Development Berhad (1MDB) on Penang island is drawing strong interest from Chinese state-owned firms seeking to expand their widening clout in Malaysia.

The 94.7ha 1MDB land in Penang's Air Itam district is being actively sought by Chinese corporations, including state-owned China Metallurgical Corp, which is willing to pay much more than local bidders, said financial executives involved in the negotiations.

They noted that the Chinese companies are looking at an outright purchase of about RM2 billion (S$671 million) for the property, or entering into a joint development deal with 1MDB that would guarantee profits of about RM3.5 billion.

1MDB, a heavily indebted firm fully owned by Malaysia's Finance Ministry, paid RM1 billion for the property in 2013.

1MDB executive director Arul Kanda Kandasamy declined to comment on China's interest in the Air Itam land.

In response to queries from The Straits Times, he said negotiations with a few parties were taking place simultaneously.

The Penang land deal underscores Malaysian Prime Minister Najib Razak's increasing tilt towards China to help resolve the huge financial burden at 1MDB, which carried debts of more than US$12 billion (S$16 billion) at one point.

Malaysia last year twice brought in Chinese investments to pare back 1MDB's debts.

1MDB's Edra Global Energy was sold to China General Nuclear Power Corp for RM17 billion in November. A few weeks later, China Railway Engineering Corp bought a stake in the Bandar Malaysia development, which gave it a 24 per cent stake, for RM12.4 billion.

Apart from the Penang land deal, financial executives said China's state-owned entities are also exploring the prospect of putting together a financial lifeline for another distressed Malaysian state-owned entity, SRC International.

The firm, which like 1MDB is wholly owned by the Finance Ministry, was set up in 2012 to pursue strategic stakes in international resource assets such as coal mines and oilfields.

It had seed capital of about US$1 billion that was secured from state-owned pension fund Kumpulan Wang Amanah Pencen, or Kwap.

And similar to 1MDB, SRC International holds investments that have plummeted in value.

One option being considered is a Chinese-led takeover of SRC International assets - which are largely made up of so-called "investment units" - in return for fresh capital that will help finance the debt owed to Kwap, said executives close to the negotiations.

Analysts said China's readiness to bail out 1MDB and SRC International is part of its plan to secure rights to build the high-speed rail (HSR) connecting Kuala Lumpur and Singapore.

The HSR project is estimated to cost as much as US$13 billion .

Details of the project have yet to be released, with Datuk Seri Najib saying in May that a memorandum of understanding to facilitate the HSR is expected to be signed with Singapore some time this month.

Since Mr Najib came to power in April 2009, Chinese state-controlled entities have secured multibillion-dollar projects, such as the second bridge linking the mainland with Penang and the Murum Dam in Sarawak, and a near stranglehold on the supply of rolling stock for the country's rail sector.

For Mr Najib, 1MDB and SRC are his weak spots.

The financial troubles at 1MDB and SRC nearly cost him his job last year when his opponents came close to pushing him out on allegations of corruption.

Today, Mr Najib, who is also Finance Minister, has consolidated his position after sacking dissenters in Umno and winning recent elections. But he still has to resolve the big debts carried by these two state funds.

There is roughly US$6 billion of domestic and foreign debt obligations related to 1MDB and SRC International, excluding the debt obligations from a bond default by 1MDB.

The 94.7ha 1MDB land in Penang's Air Itam district is being actively sought by Chinese corporations including state-owned China Metallurgical Corp, which is willing to pay a huge premium over local bids, said financial executives involved in the negotiations.

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A version of this article appeared in the print edition of The Straits Times on July 06, 2016, with the headline Chinese firms dangle lifeline for 1MDB, SRC. Subscribe