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03-06-2014, 07:52 AM
Worry over surging debt at big KL fund
1Malaysia Development Bhd struggling under burden of US$11b in borrowings
Published on Jun 3, 2014 1:12 AM
SINGAPORE - Lurking beneath Malaysia's solid investment- grade sovereign rating is a risk posed by a US$14 billion (S$17.5 billion) investment fund that is not even generating enough cash from operations to cover interest costs.
With Prime Minister Najib Razak chairing its advisory board, 1Malaysia Development Berhad (1MDB) is struggling under the burden of US$11 billion in borrowed money.
The government says it only guarantees around 14 per cent of the debt. The investment community assumes it would provide more if needed, and it is the potential strain on Malaysia's debt position from these contingent liabilities that raises concern.
"We don't know how well 1MDB is doing," said senior analyst of sovereign risk group Christian de Guzman at ratings agency Moody's Investors Service. "It does pose a risk in terms of the amount of borrowings they have made over the past few years."
Controversy has dogged 1MDB almost since it was first set up months after Datuk Seri Najib came to power in 2009, and used the fund for funding projects that form part of his Economic Transformation Programme.
Critics have questioned its investment choices, the size of its debt, US$2.25 billion parked in a Cayman Island fund, hundreds of millions of dollars of revenue earned by Goldman Sachs for handling its bond issues, delays in its accounts, changes of auditors, and a perceived lack of transparency.
A US$1.9 billion bridging loan that fell due in November has been rolled over twice, most recently two weeks ago, in order to give 1MDB more time to launch a US$2 billion initial public offering that would reduce debt incurred in buying 15 power plants.
In 2013, 1MDB, with liabilities of more than US$13 billion, generated cash flow of RM860 million (S$336 million) from operations, far below the annual interest outgo of RM1.62 billion. It would have made a RM1.85 billion loss, but for a RM2.7 billion revaluation of its property portfolio.
The Prime Minister's Office and 1MDB did not respond to Reuters' requests for comment.
1MDB defended itself in a statement in February, saying its power assets had strong growth potential. "All this points to a high value proposition that can be expected to stimulate markets and bring significant FDI and cash profits to the shareholder - the government of Malaysia," it said.
But independent analysts also have voiced concern that 1MDB's debts could be pushing Malaysia into risky territory.
"1MDB remains somewhat of an enigma," Bank of America Merrill Lynch economist Chua Hak Bin said in a note. "What stands out, however, is 1MDB's high leverage, which has raised concerns that 1MDB could emerge as a serious contingent liability for the government."
Malaysia's debt-to-GDP ratio stood at 53.8 per cent at the end of 2013, central bank data shows, up sharply from 43 per cent in 2008 and close to an official debt ceiling of 55 per cent, beyond which the government must seek parliamentary approval.
Contingent liabilities, however, stood at 15.9 per cent of GDP, up from 9 per cent in 2008, bringing total government and government-backed debt to 69.7 per cent of the economy, and the off-budget character of 1MDB raises questions.
"It can be viewed as a way to circumvent the 55 per cent ceiling on government debt to GDP, while shielding this spending from parliamentary scrutiny," said fund manager Prashant Singh at Neuberger Berman in Singapore.
Fitch Ratings cut the outlook on Malaysia's A- rating to negative from stable last July.
"Malaysia's negative outlook is driven by factors such as the rise in guaranteed and contingent liabilities like 1MDB, due to its sovereign ownership linkage, and the sharp erosion in current account surplus," said Mr Andrew Colquhoun, Fitch sovereign analyst for Malaysia.
REUTERS
1Malaysia Development Bhd struggling under burden of US$11b in borrowings
Published on Jun 3, 2014 1:12 AM
SINGAPORE - Lurking beneath Malaysia's solid investment- grade sovereign rating is a risk posed by a US$14 billion (S$17.5 billion) investment fund that is not even generating enough cash from operations to cover interest costs.
With Prime Minister Najib Razak chairing its advisory board, 1Malaysia Development Berhad (1MDB) is struggling under the burden of US$11 billion in borrowed money.
The government says it only guarantees around 14 per cent of the debt. The investment community assumes it would provide more if needed, and it is the potential strain on Malaysia's debt position from these contingent liabilities that raises concern.
"We don't know how well 1MDB is doing," said senior analyst of sovereign risk group Christian de Guzman at ratings agency Moody's Investors Service. "It does pose a risk in terms of the amount of borrowings they have made over the past few years."
Controversy has dogged 1MDB almost since it was first set up months after Datuk Seri Najib came to power in 2009, and used the fund for funding projects that form part of his Economic Transformation Programme.
Critics have questioned its investment choices, the size of its debt, US$2.25 billion parked in a Cayman Island fund, hundreds of millions of dollars of revenue earned by Goldman Sachs for handling its bond issues, delays in its accounts, changes of auditors, and a perceived lack of transparency.
A US$1.9 billion bridging loan that fell due in November has been rolled over twice, most recently two weeks ago, in order to give 1MDB more time to launch a US$2 billion initial public offering that would reduce debt incurred in buying 15 power plants.
In 2013, 1MDB, with liabilities of more than US$13 billion, generated cash flow of RM860 million (S$336 million) from operations, far below the annual interest outgo of RM1.62 billion. It would have made a RM1.85 billion loss, but for a RM2.7 billion revaluation of its property portfolio.
The Prime Minister's Office and 1MDB did not respond to Reuters' requests for comment.
1MDB defended itself in a statement in February, saying its power assets had strong growth potential. "All this points to a high value proposition that can be expected to stimulate markets and bring significant FDI and cash profits to the shareholder - the government of Malaysia," it said.
But independent analysts also have voiced concern that 1MDB's debts could be pushing Malaysia into risky territory.
"1MDB remains somewhat of an enigma," Bank of America Merrill Lynch economist Chua Hak Bin said in a note. "What stands out, however, is 1MDB's high leverage, which has raised concerns that 1MDB could emerge as a serious contingent liability for the government."
Malaysia's debt-to-GDP ratio stood at 53.8 per cent at the end of 2013, central bank data shows, up sharply from 43 per cent in 2008 and close to an official debt ceiling of 55 per cent, beyond which the government must seek parliamentary approval.
Contingent liabilities, however, stood at 15.9 per cent of GDP, up from 9 per cent in 2008, bringing total government and government-backed debt to 69.7 per cent of the economy, and the off-budget character of 1MDB raises questions.
"It can be viewed as a way to circumvent the 55 per cent ceiling on government debt to GDP, while shielding this spending from parliamentary scrutiny," said fund manager Prashant Singh at Neuberger Berman in Singapore.
Fitch Ratings cut the outlook on Malaysia's A- rating to negative from stable last July.
"Malaysia's negative outlook is driven by factors such as the rise in guaranteed and contingent liabilities like 1MDB, due to its sovereign ownership linkage, and the sharp erosion in current account surplus," said Mr Andrew Colquhoun, Fitch sovereign analyst for Malaysia.
REUTERS
