On 18th May 2012, two 1Malaysia Development Bhd (1MDB) subsidiaries raised bonds amounting to US$3.5 billion. 1MDB Energy Limited and 1MDB Energy (Langat) Limited both issued a 10-year bond raising US$1.75 billion each to fund the acquisitions of independent power producers (IPPs), Tanjong Energy and Genting Sanyen respectively.
However, to 1MDB was unable to raise the necessary funds despite pricing the bonds at a handsome 5.99% coupon rate on its own accord. Despite being wholly-owned Ministry of Finance subsidiary, 1MDB had to secure a third-party guarantee to ensure a successful fund-raising exercise.
Interestingly, 1MDB managed to find a “friend” who was willing to guarantee the loans, International Petroleum Investment Company (IPIC). IPIC is a wholly-owned investment holding company of the Abu Dhabi Government. It is also the parent-company of another common collaboration partner of 1MDB, Aabar Investments.
As reported in latest edition of The Edge Weekly, this guarantee was certainly no “friendly gesture” on the part of IPIC or the Abu Dhabi Government, but instead came at a exorbitant price to 1MDB.
Firstly, 1MDB had to dock approximately 40% of the loan with IPIC as security deposit. This amounted to RM4.47 billion (US$1.4 billion) recorded in the March 2014 financial statements. Effectively, this means that 1MDB is pay 5.99% interest on a US$3.5 billion loan despite having access to only 60% of the funds or US$2.1 billion.
Secondly, 1MDB had to offer the option for Aabar to acquire up to 49% equity interest in Powertek Investment Holdings (PIH) and 1MDB Energy (Langat) which are the holding companies for the acquired IPPs in order to secure the guarantee.
Based on the latest financial statements, 1MDB disclosed that its subsidiary 1MDB Energy Holdings Limited has taken a bridging loan facility of US$250 million in May 2014 to buy back these options granted to Aabar Investments. This represents a compensation to Aabar although the final settlement consideration is still dependent on the valuation of 1MDB Energy’s listing exercise expected early next year and hence may increase even further.
Effectively, this US$250 million represents a fee paid to IPIC in order to secure its corporate guarantee for 1MDB subsidiaries to raise US$3.5 billion, or approximately 7.1% of the funds raised!
The above are on top of the exorbitant “certain commissions, fees and expenses” paid to the investment bank, Goldman Sachs which was previously criticised in the Parliament amounting to approximately 10% or US$350 million.
Taking all of the above cost of funds – US$250 million and US$350 million – and the locked deposit of US$1.4 billion, 1MDB’s subsidiaries have taken a loan of US$3.5 billion will work out to an unheard of 13.98% effective interest for a so-called “sovereign wealth fund”. The loans are practically sold like junk bonds!
To put it bluntly, 1MDB might as well have gone to the loan sharks to raise the funds. It is mind-boggling why a 100%-owned subsidiary of the Ministry of Finance needs to become so desperate in paying such outrageous fees, costs and terms in order to secure financing for its activities.