Middle-East concerns mount over 1MDB debt

It is not just in Malaysia that people are concerned about 1MDB. Apparently, certain parties in the Middle-East are getting a bit jittery. This was the lead in the Business section of the Gulf Times on 15 January 2015.

This is what happens when governments set up companies to dabble in business on behalf of the people with little transparency or accountability in Parliament.

The full report from the Gulf Times is reproduced below:

Mideast investments at stake as Malaysia debt concerns mount

By Arno Maierbrugger/Gulf Times Correspondent Bangkok

Mounting troubles at Malaysia’s government-owned strategic investment company 1Malaysia Development Berhad, or 1MDB, which has a focus on promoting foreign direct investment in Malaysia, have caused alarm bells ringing for two of its main investment partners from the Middle East, the Qatar Investment Authority and Abu Dhabi’s Aabar Investment.

1MDB was up in 2009 by Malaysian Prime Minister Najib Razak “to drive strategic initiatives for long-term economic development” in Malaysia and has been focused on development projects in the areas of energy, real estate, tourism and agribusiness. But lately more on high-profile projects which came under fire from opposition politicians and media such as the Tun Razak Exchange, a new financial district in Kuala Lumpur named after Najib Razak’s father and partly funded by Aabar, and the 200-hectare Bandar Malaysia project, an integrated urban development also in Kuala Lumpur, of which one of the partners is the QIA. The value of Middle Eastern investment in these two projects alone is $8bn: Qatar has pledged $5bn for Bandar Malaysia, and Aabar has raised $3bn through its 50:50 joint-venture with 1MDB called Abu Dhabi Malaysia Investment Company.

However, both projects are way behind schedule, and the Middle East partners have reportedly become displeased with the lack of transparency in sharing 1MDB’s plans and strategies with investors, as well as with delays that are causing financing costs to rise. According to sources quoted by various Malaysian newspapers, both Qatar and Abu Dhabi are considering to step back from the projects, as is an Islamic bank from Kuwait, reportedly Kuwait Finance House, and US-based Insurance company Prudential.

Things became worse for 1MDB when the fund missed a loan-repayment of $563mn due end-December 2014 to Malaysian Banks Maybank and RHB, causing concerns that the fund might have trouble to manage its total borrowings of $11.8bn. 1MDB also had to repeatedly delay the planned initial public offering of its power plant unit which was expected to reduce the fund’s debt burden. However, a longer-than-expected due diligence process and debt refinancing negotiations lead to another delay.

Early January, Mohd Hazem Abdul Rahman, 1MDB’s managing director and chief executive officer, stepped down after less than two years in the position. He has been under fire for the huge debts the fund accumulated, as well as for certain investment decisions and high fees for consultants. Rahman was replaced by Abu Dhabi-based Malaysian investment banker Arul Kanda, formerly executive vice president and head of investment banking at Abu Dhabi Commercial Bank.

It is quite obvious that the decision to replace the CEO with an experienced Abu Dhabi banker was driven by 1MDB’s strategic partners in the Gulf after rumours of a possible default of 1MDB started spreading.

“It would upset lot of people including Malaysia’s strategic partners in the Middle East if a default happens,” the Malaysian Insider newspaper quoted a Singapore banking source as saying.

Critics argue that the debt-ridden investment fund has become a “threat” to Malaysia’s entire financial system where 45% of sovereign debt is being held by foreign creditors, mainly in sukuk and other Islamic financial instruments.

Foreign investors also have started to worry about the sovereign credit rating of the country which is currently A3/A- but could possibly drop to the level of Thailand’s Baa1/BBB+ in case of continued refinancing problems of 1MDB or even a necessary bailout by the government. This would be a huge embarrassment for Malaysia’s prime minister who is also chairman of 1MDB’s board of advisers.