Finance Ministry must explain whether 1MDB will go bankrupt or even insolvent

The Finance Ministry must explain whether 1 Malaysia Development Bhd (1MDB) may go bankrupt or even insolvent if they continue to rely on an Asset Revaluaton Gain of RM 2.7 billion to record a profit of RM 778 million and ignores the rise in total debts to RM 42.3 billion that nearly matches its total assets of RM 44.7 billion? When 1MDB finally submitted its much-delayed accounts for FY2013 ended March 31to the Companies Commission of Malaysia, after having changed auditors, 1MDB revealed once againthat it cannot make money without creatively manufacturing a paper profit from land revaluation.

1MDB’s after tax profit of RM778.2 million (on revenue of RM2.6 billion) for FY2013 was the result of a land revaluation gain of RM2.7 billion, without which 1MDB would have lost RM 1.8 billion. The same trick was played out for financial year 2012 when 1MDB recorded an after-tax profit of RM 44.2 million, only after making gains of RM 569.9 million from revaluing its land assets.

1Malaysia Development Bhd (1MDB) is a strategic development company, established by the Ministry of Finance to drive investments and ensure sustainable economic development. Since the state investment agency was established in 2009, 1MDB has grown to become a sovereign wealth fund approaching the size of Khazanah (see below). Assets of 1MDB had reached RM 45 billion as at end-March 2013 as compared to Khazanah’s RM64 billion.

What is of concern is the high debt of 1MDB, with total liabilities of RM 42.3 billon, which are larger than the RM 37.4 billion debt at Khazanah and RM 4.4 billion debt at EPF. 1MDB’s annual debt service is RM 1.6 billion. There is also an impairment loss of almost RM1.2 billion from its acquisition of power assets. This raises serious concerns of its long-term viability, including the question whether the huge debts will finally make 1MDB insolvent or go bankrupt.

Further 1MDB needs to address questions about the frequent changes of auditors (three since 2009); long delay in releasing audited reports; hefty premiums paid for regional energy assets; cash parked in overseas investment institutions; and high interest rates paid for some bond issues (for example, 5.75% for a RM 5 billion government-guaranteed bond issue). Even though the Federal government’s contingent liability is limited to RM5 billion, this is still a huge sum that must be accounted for in the public interest.

For this reason 1MDB must come clean not only to uphold transparency and accountability but to ensure that its management is professionally and competently run. Creative accounting techniques of relying on asset revaluation gains to record a profit must stop. Similarly, the Finance Ministry must ask the right questions on what are the efforts taken by management to reduce 1MDB’s huge RM 42.3 billion liabilities?

Note: Khazanah’s financial statement as at 2012; EPF’s at the end- 2013; 1MDB at the end- March 2013

**BANK OF AMERICA MERRILL LYNCH GLOBAL RESEARCH ESTIMATES