1MDB scandal: Financial institutions have serious explaining to do

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’.