'Foolhardy' Arul already MISLEADING Malaysians by insisting 1MDB a 'responsible' borrower - Tony

Bloomberg last week reported 1Malaysia Development Bhd (1MDB), the country’s state investment company, defended its credentials as a borrower after a newspaper reported it failed to repay a loan of more than US$500 million last month.

“As far as the banking sector and the credit sector is concerned, we are responsible borrowers” and the company has never defaulted, Arul Kanda, who was named president of 1MDB yesterday, said in an interview. “We need to manage the use of our cash in the most efficient way for the company.”

It is absolutely true that 1MDB has never defaulted on its loans, not yet anyway. However, that does not at all mean that 1MDB does not have any troubles paying its debts or does it in anyway qualify 1MDB as a “responsible borrower”.

The fact of the matter is that 1MDB has missed two repayment deadlines for a RM2 billion debt in November and December 2014. This RM2 billion loan itself is part of a rescheduled and restructured debt it couldn’t pay in November 2013. The Edge Financial Daily even reported that Bank Negara Malaysia has summoned the key executives of 1MDB over the issue and warned them of dire consequences should they fail to meet the next deadline at the end of this month.

In fact 1MDB is facing its current predicament of a cash crunch and facing extremely difficulties in servicing both its operational and debt commitments is a direct result of 1MDB’s history not being a “responsible borrower”.

Arul kanda

Borrowing money to lend money

1MDB was never intended as a bank or a lending institution. However, in 2010, 1MDB lent US$1.2 billion Petrosaudi International, a company with no tangible track record. Subsequently, 1MDB borrowed more money to lend an additional US$700 million to them. Petrosaudi was founded only in 2005 by a Tarek Essam Ahmad Obaid who was then in his late 20s. How were such borrowings in any way “responsible”?

While this loan was redeemed in full in 2013, the money was controversially “invested” in Cayman Islands. Despite a commitment their auditors Deloitte Malaysia that the funds will be fully redeemed and received by the end of November 2014, the sum of US$1.23 billion has yet to be repatriated to date.

Borrowing at a high cost

1MDB is now world famous for borrowing money at extremely high interest rates. They borrowed their first RM5 billion in 2009 at 5.75% interest and still gave a 12% discount for their 30-year bonds despite a Federal Government guarantee. The effective interest rate paid was hence 6.71%, despite the 10-year Malaysia Government Securities being priced only at 3.85% then.

Subsequently, they issued another 2 bonds in May 2012 amounting to US$3.5 billion paying a coupon rate of 5.99% despite a guarantee by International Petroleum Investment Corporation (IPIC), an investment arm of the Abu Dhabi Government. On top of the excessive “commissions, fees and charges” exceeding 11% of the funds borrowed, 1MDB had to deposit 40% of the funds with Abu Dhabi and grant them options to 1MDB’s power plant investments.

1MDB further issued a US$3 billion bond in March 2013 and paid Goldman Sachs a whopping US$282 million in “commissions, fees and charges”, well exceeding international norms of less than 2%. The proceeds of the loans was meant to be invested in a joint venture, Abu Dhabi Malaysia Investment Corporation (ADMIC). However, after nearly 2 years, ADMIC remain stillborn while nearly half the money raised have been siphoned for “working capital and debt repayment purposes” last year.

The above examples clearly proved that 1MDB cannot in any way be described as a “responsible borrower”. Instead, the more apt description of 1MDB’s behaviour to date would be “reckless borrower”. 1MDB has been reckless in borrowing to lend money and it has been reckless in paying over-the-top to borrow the funds.

Most recklessly, it has been abusing its near sovereign status with both explicit and implicit guarantees by the Federal Government to borrow excessively. It is precisely because 1MDB has been an irresponsible borrower that it has accumulated a debt exceeding RM42 billion, threatening the entire Malaysian financial system with its inability to pay up a mere RM2 billion debt due since November 2014.

The new CEO, Arul Kandasamy was not responsible for 1MDB’s dire state of affairs today. However, it will be foolhardy for him to pretend to the public that nothing much was wrong in the past and exonerating the company of its sins. Without recognising the major mistakes committed to date, he cannot possibly cure 1MDB’s ills and turn around the fortunes of the besieged company.

Tony Pua is MP for PJ Utara