Background
In last week’s issue of The Edge, the weekly highlighted “1MDB’s habit of overpaying to raise money.” In May 2012 and March 2013, 1MDB raised a 10-year loan of US$1.75 billion (RM5.6 billion) and a US$3 billion (RM9.6 billion) respectively.
I had then questioned the shocking fact that US$196 million (RM630 million) and US$283 million (RM906 million) were deducted for “certain commissions, fees and expenses”. These amounts worked out to a staggering 11.2% and 9.4% of the funds raised.
As demonstrated in the story, the standard fees payable to investment bankers for other entities and governments ranges only between 0.1% and 2%. Penerbangan Malaysia Bhd for example, raised US$1 billion paying only 0.5% in fees and expenses. The Mexican and Uruguayan governments on the other hand, issued bonds amounting to US$3.9 billion and US$2.0 billion by deducting only 0.2% and 0.1% for fees and expenses respectively.
Both Goldman Sachs, the sole and exclusive arranger and bookrunners for the offerings, and 1MDB gave separate clarifications on the question of exhorbitant “commissions, fees and expenses”.
Goldman Sachs explanation
On 29th October, The Edge Financial Daily carried the front-paged story entitled “Goldman says no payment to third parties”. The daily reported that Goldman Sachs said that the “certain commissions, fees and expenses” referred in the loan offer documents “are standard terms used to describe part of Goldman Sachs compensation for the risks assumed in underwriting the bonds in question”.
The Head of corporate communications of the investment bank in the Asia Pacific, Edward Naylor also said that “other than legal and accounting firms providing professional services, no fees or commissions were paid by 1MDB or Goldman Sachs to external third parties in connection with these transactions, nor have we ever been asked by 1MDB or others to pay such fees or commissions”.
1MDB explanation
Then on Friday, 31st October, 1MDB explained that “both these bonds were issued at a discount typical of most bond offerings.”
Hence the bulk of the “commission, fees and expenses” was not actually paid to Goldman Sachs, but was actually a “discount” given to bondholders who subscribed to the fund-raising exercise.
1MDB said “we would like to make clear that the bulk of the difference between the bonds’ par value and the net proceeds are attributed to the bonds being issued at a discount. This decision is to ensure the successful completion of the fundraising in view of internal and external factors of the market, the speed to complete the offering and the scale of the underwriting”.
Conflicting answers
I must say that I’m stunned that Goldman Sachs and 1MDB gave vastly different answers to the issue of the exhorbitant “commissions, fees and expenses” detailed in the loan offer documents prepared by the investment banker.
Goldman says there was no commission paid to any third party and all the charges amounting to RM1.54 billion were payable to them, as well as the legal advisors and accountants taking part in the exercise.
1MDB on the other hand, claimed that the bulk of these RM1.54 billion charges were provided as a discount to the bond-subscribers, and not payable to Goldman.
Who is telling the truth?
The answers provided by Goldman Sachs and 1MDB are in direct conflict with one another. The conflict is even more frightening given the multi-billion ringgit scale of the exercise.
Who is telling the truth? Is anyone telling the truth? Or are both parties telling only half-truths?
In an attempt to discover the truth, I referred to the Offering Circulars issued for the above 1MDB fund-raising exercises by Goldman Sachs in May 2012 and March 2013 respectively.
Both these documents confirmed that the “Issue Price” was 100%, which means that for every bond sold for RM1, the bondholder will pay RM1 for the bond. In both of these documents however, there was not a single mention or reference to any “discount” to be offered for bondholders. While the offer of discounts is certainly a common practice, these discounts are almost always stated in these “Offer Circulars” or prospectuses.
In addition, both the offer documents stated that Goldman Sachs International (GSI) “has agreed to procure subscribers for, or failing which to subscribe from the Issuer for, the aggregate principal amount of the Notes at 100% of the principal amount of the Notes. For its services, GSI will receive fees and commissions which will be deducted from the gross proceeds of the Notes.”
This means that GSI has underwritten the full 100% value of the bonds in the event that GSI was unsuccessful in attracting investors for the 1MDB bond-exercise. For these services, GSI was to be paid US$196.2 million and US$283.24 million respectively in “certain commissions, fees and expenses”. In other words, since it’s fully under-written, why should there still be a need for 1MDB to give “discounts”?
Hence, unless the “Offer Circulars”, prepared by GSI and a panel of international lawyers including, Linklaters LLP and Baker & McKenzie LLP were less than truthful to the prospective bond investors, 1MDB has attempted a cover up for the cutthroat RM1.54 billion “commissions, fees and expenses” paid by claiming a discount was provided to the bond investors.
There is only 1 way 1MDB to prove its critics wrong. It is not by giving fudgy answers like “discount typical of most bond offerings”. It is by detailing exactly the breakdown of the RM1.54 billion in “commissions, fees and expenses” paid – how much to Goldman Sachs, how much to the which lawyers, how much to which accountants, how much to miscellaneous fees and how much discount, if any at all, given to which bond-investor.
If 1MDB fails to provide such a list endorsed by Goldman Sachs, then Malaysians can only assume that the 1MDB is hiding the truth, and I reiterate my call that the top management must be severely punished.