1MDB scandal: Financial institutions have serious explaining to do

What 1MDB claimed back then.

The financial institutions that arranged the massive loans for 1MDB have to answer some tough questions. 

The Edge (8 June 2015) noted the following:

When 1MDB issued its first bond – a RM5.0bn 30-year sukuk – in August 2009,  the banking industry was surprised that AmBank was picked to handle it. AmBank worked with Goldman Sachs on the bond issuance, which was guaranteed by the Malaysian government.

The way the selling of the attractive bond was done upset some banks that were cut off from participating. The bonds were deemed attractive because the interest 1MDB was willing to pay those who bought the bonds was 5.75 per cent – which was higher than the usual 4 per cent for debt issued and guaranteed by the Malaysian government.

Banking sources say certain intermediaries made money from the 1.75 per cent spread between the 5.75 per cent interest 1MDB was prepared to pay and the 4 per cent benchmark rate.  Ambank was also involved in other Jho Low and 1MDB deals … (including the TRX adnd Sungai Besi land deals)….

In 2011 and 2012, Goldman Sachs led three international bond issues for 1MDB totalling US$6.5bn, for which they received fees and commissions of US$670m (RM2.4bn) or just over 10 per cent of the gross proceeds.

This was way higher than the 0.5-2.0 per cent fees that investment banks normally make from bond issues.

Mahathir wrote in his blog on 12 June 2015:

9. Goldman Sachs which was entrusted with raising the (RM5bn) loan was given;

i) Commission of 10%
ii) The interest rate was fixed at 5.9%

10. What this means is that of the RM5 billion borrowed 1MDB would get only RM4.5 billion. Goldman Sachs would get RM500 million as commission, an inordinately large sum.

11. But 1MDB would pay 5.9% interest on the whole of RM5 billion. Since it gets only RM4.5 billion the rate of interest on this amount would be 6.6% plus. Goldman Sachs need not pay interest on the RM500,000,000/- it got as commission.

12. Loans taken by Government or guaranteed by Government would normally carry 3% interest or less. But the 1MDB loan cost almost 7% interest i.e, about RM350 million a year or almost RM1 million per day.

13. Who approved such terrible terms for a loan to a government owned company? We would like to know who. There must be some documents with the signature of the approving authority. If not somebody needs to answer for this stupidity. Or is it abuse of authority.

But 1MDB countered in a press release (16 June 2015):

3. Tun Mahathir claims “Goldman Sachs which was entrusted with raising the loan” and “Goldman Sachs would get RM500 million as commission”.

  • The entire premise of this statement is incorrect as the sukuk was arranged by AmBank, not Goldman Sachs.
  • AmBank fully underwrote the sukuk issuance (i.e. it took the risk to provide RM5 billion to 1MDB) and, therefore, earned any commission it received for doing so.

But why did it take 1MDB so long to clarify that it was Ambank and not Goldman Sachs as earlier reported?

1MDB adds:

4. Tun Mahathir claims “Loans taken by Government… would normally carry 3% interest of less. But the 1MDB loan cost almost 7% interest”.

  • It is a fact, verifiable by a check on the relevant Bank Negara Malaysia webpage, that on 29 May 2009 (the date the RM5 billion sukuk was issued), yields for Government bonds were 2.82% (3 years maturity), 3.56% (5 years maturity) and 4.27% (10 years maturity). It is clear that for every additional year of maturity, the yield is higher.
  • The RM5 billion sukuk issued by 1MDB has a 30-year maturity, i.e. it would mature at a date three times later than the 10-year government bond, which was the longest maturity period for a bond at that time. There were no 30-year government bonds in issuance for comparison purposes.
  • The 1MDB sukuk was issued at a discounted price of approximately 88, i.e. a discount to face value of 100, which is common for a fixed income instrument. The discount represents the additional yield benefit to sukuk investors. This discount, when added to the coupon of 5.75%, results in a yield of approximately 6.15% – not 7% as incorrectly claimed by Tun Mahathir.
  • Based on the logic outlined above, 1MDB achieved 30-year financing for its sukuk at a yield of 6.15%. By contrast, 10-year government bonds had a yield 4.27%. Given the difference in the maturity period, this was a good outcome by any yardstick in the fixed income markets.

In the first place, why is 1MDB taking 30-year loans against future oil revenue? Is it common for a government-linked agency to take such long-term loans? What if the oil revenue dries up well before that? So memanglah, there’s no basis for comparison as the farthest benchmark you have is just 10 years.

What is the whole logic of having 1MDB? Why the need for such an outfit, with so little oversight, in the first place?

Whether it is Ambank-lah or Goldman Sachs-lah, these financial institutions have some serious explaining to do before the PAC about the terms of the bonds and sukuk and what-not that they arranged for 1MDB.

I don’t like the sound of all this at all. Some folks have become very wealthy – and it sure isn’t the Rakyat.

While we may curse the 1MDB debt, let us not forget that 1MDB was helped all the way by these financial institutions, which earned fat fees, commissions and interest. Did these fat cats bankers and lenders think of how 1MDB was going to pay back these loans/bonds/sukuk/whatever – or were they merrily arranging even more loans just because they were backed by government guarantees, which means there was no way there would be a default.

Or so they think. Perhaps it is time these lenders took a ‘haircut’.

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gk ong
gk ong
24 Jun 2015 10.59am

The recent overpriced purchases by MARA and FGV seem to mirror the modus operandi of 1MDB?

Ed G
Ed G
26 Jun 2015 10.47am
Reply to  gk ong

The Australian authorities has initiated the investigation on MARA for the possibility of corruption or money laundering. Obviously they need not have to wait for any internal audit reports. Neither did they ask the complainants to supply them with evidence before they can do anything. In a nutshell, they understand that it is their professional duty to obtain the required evidence and not rely (or wait?) on someone else’s evidence.

22 Jun 2015 5.18pm

Now the whole country is thirsty for truth but definitely won’t drink urine !!!

22 Jun 2015 8.25am

That 1MDB issued very very expensive debt is clear but the question of why is probably one of the most important issue of 1MDB.. If you look at those involved in approving the issue, they are no lay-men – they can’t be making such a big mistake. No one would really make the mistake even for a small issue but for such a large issue? Now its revealed that they overpaid for energy assets at least partly because it was convoluted election campaign financing.. Its absolutely clear, that Najib, from the start, intended 1MDB to be a vehicle for his… Read more »

21 Jun 2015 3.18pm

Always talking without thinking from an overseas articles that is not substantiated. Like I was telling who is the owner of the Edge.

21 Jun 2015 7.14pm
Reply to  iSupercally

Super Yang,
? Is where is our money??????

21 Jun 2015 10.49pm
Reply to  hamster

What money have been lost

gk ong
gk ong
21 Jun 2015 1.57pm

Tony Pua’s response to WSJ’s revelations:

“Did Tanjong Power and the Farlim Group which sold the Penang land also contribute significantly to YR1M or any other charities which the prime minister controls?

“If proven, then the RM42 billion 1MDB scandal will widen from embezzlement, misappropriation and mismanagement to outright corruption by the Prime Minister –abusing tax-payers’ funds to further his own political interests, and that of Umno and its coalition partners,”

21 Jun 2015 10.51pm
Reply to  gk ong

Another deception

gk ong
gk ong
21 Jun 2015 10.25am

I like this comment on MKini:

1MDB bought the power assets at a much-inflated price. The seller then ‘donated’ back a part of the money to a charity.

Najib being the chairperson of the charity then used a large part of the funds to finance his election campaign in Penang. So in effect, the nasi kandar, beer, satay as well as ‘goodwill money’ for the voters then were all actually taxpayers’ monies.

This is just the tip of the iceberg. What about the other purchases? The Public Accounts Committee (PAC) should look into this thoroughly.