Malaysia's 1MDB settles debt owed to Abu Dhabi with China backing

Site of the 1MDB flagship Tun Razak Exchange development in Kuala Lumpur on March 1, 2015.
Site of the 1MDB flagship Tun Razak Exchange development in Kuala Lumpur on March 1, 2015.PHOTO: REUTERS

KUALA LUMPUR - State-owned 1Malaysia Development Berhad (1MDB) has made the final settlement of US$602.7 million ($S810 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 the troubled 1MDB, was made last Friday (Dec 22), ahead of the end-December deadline that both parties agreed to in early April this year.

IPIC confirmed in a statement on Wednesday 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 May 9, 2017".

"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," one Malaysian government official familiar with the settlement said.

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 128ha 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 on Wednesday, 1MDB 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. Investigations have also been carried out 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 dollar loan to IPIC before end-2017.

The settlement of the loan this week would also set in motion the second limb in the overall resolution to the dispute.

According to financial executives familiar with the situation, Abu Dhabi will begin negotiations in January 2018 with 1MDB regarding the outstanding US$3.5 billion that remains in dispute.

Separately, Malaysian government officials said 1MDB's president and chief executive officer Arul Kanda Kandasamy, whose contract expires later this month, will continue in office. It is believed that Prime Minister Najib Razak, who chairs 1MDB's advisory board, will decide on a new role for him after the country's general election, which is widely expected in the first half of next year.

Mr Arul, who has been central in resolving 1MDB's debt troubles, has been identified as a contender for the top job at state-owned strategic investment fund Khazanah Nasional.