Yesterday, it was reported by both Reuters and The Edge Financial Daily that businessman Tan Sri Ananda Krishnan is understood to have firmed up an agreement to loan beleaguered 1Malaysia Development Bhd (1MDB) as much as RM2 billion to help the strategic investment fund settle a debt obligation to Malayan Banking Bhd (Maybank) and RHB Bank Bhd due at the end of this month.
The news agencies quoted sources that “it’s not yet a done deal as the terms of the loan have to be agreed on but it looks like the only option now… And even then, this is an interim solution so that the banks get paid.”
The news is absolutely disgraceful for 1MDB and a terrible embarrassment for the Malaysian Government, that it’s sovereign “investment fund” had to stoop so low as to depend on the goodwill of a local billionaire to temporarily settle its loans.
This is despite the fact that 1MDB claimed that it had already fully “redeemed” its controversial investment in Cayman Islands, amounting to US$1.1bn or RM3.9bn, at the current favourable exchange rate.
Besides the above, the desperate last resort loan from Ananda proves beyond any doubt that 1MDB is not only in a serious financial crisis, no other commercial lending institutions appear willing to lend to 1MDB anymore, even for a short term.
Under the current circumstances, 1MDB is essentially held hostage to the “white knight” and there will certainly be concerns over the terms of the loan which will be conceded in Ananda’s favour.
This is especially since 1MDB has a terrible track record of securing “special loans”.
For example, when 1MDB raised US$3.5 billion of 10-year bonds to fund the acquisitions of independent power producers (IPPs), Tanjong Energy and Genting Sanyen respectively, it could only do so with the corporate guarantee provided by International Petroleum Investment Company (IPIC), a wholly-owned investment vehicle of the Abu Dhabi government.
Despite having to price these bonds at an expensive 5.99%, the “guarantee” from IPIC came with an expensive price tag.
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 1MDB’s acquired energy subsidiaries in order to secure the guarantee. The 49% equity interest is worth at least US$250 million, the amount 1MDB paid to buy back these options based on the latest financial statement as at March 2014.
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 with an unheard of 13.98% effective interest for a so-called “sovereign wealth fund”.
It is crucial therefore for 1MDB, as a wholly-owned subsidiary of the Ministry of Finance to be transparent and disclose in full the terms agreed with Tan Sri Ananda Krishnan for this temporary loan. The new CEO, Arul Kanda must keep to his word that he welcomes “public scrutiny” as “a good thing” that “will only serve to strengthen the company and its governance”.
If 1MDB is further short-changed, then perhaps whatever value that is left of the stalled initial public offering (IPO) of 1MDB’s energy subsidiaries will be insufficient to cover the massive RM42 billion debt which 1MDB has accumulated to date. The domino effect from such an outcome would prove disastrous from both the country’s financial system and economy.