Something’s seriously wrong: Ipic seeks arbitration for disputed RM27bn with 1MDB

So it has come to this: Ipic, Abu Dhabi’s sovereign wealth fund, is seeking arbitration in London for some US$6.5bn, which it claims is owed to it following a dispute with 1MDB.

Last year, Ipic had given 1MDB a one billion dollar loan, and it also said it would assume certain interest payments, as part of a deal to be the guarantor for two bond issues. But it reserved the right to claim reimbursement from the ministry of finance.

The dispute arose after a total of US$3.5bn was transferred to Aabar Investments PJS Ltd in the British Virgin Islands (Aabar BVI) – which Ipic said was not related to its Aabar Investments. The WSJ has the registration document for Aabar BVI here, but the question is, is this document genuine or fraudulent?

How does all this square up with what 1MDB CEO Arul Kanda had talked up in an interview with The Edge (25 April 2016 edition)?

In 2012, 1MDB had raised US$3.5bn from the 10-year bonds to buy the Tanjong and Genting power assets. Arul said Ipic guaranteed the bond (borrowings) received by 1MDB totalling US$3.5bn and the interest payments payable of US$2.0bn. So Ipic’s total exposure was US$5.5bn.

In return, 1MDB paid a security deposit of US$1.4bn to Aabar BVI. The Edge pointed out this deposit works out to 25 per cent of US$5.5bn, which seems extremely high.

Under the agreement, if 1MDB doesn’t repay its bond borrowings, Ipic has to stand in as the guarantor, and they can later claim from 1MDB. (But what if 1MDB is unable to cough up? Then the ministry of finance has to step in with public money.)

Anyway, what happened to the US$3.5bn that 1MDB raised from the bond issue? (Goldman Sachs fees, commission – US$0.393bn or 11.2 per cent.)

Payments to imitation Aabar (BVI):

• Security deposit paid (not to Ipic but to imitation Aabar) – US$1.4bn*
• May 2014 payment to terminate Aabar’s so-called options** – US$0.993bn
• “Top-up deposits” to obtain a guarantee on an investment*** – US$1.15bn
• Total – US$3.543bn (i.e. about the same as the amout raised from the bond borrowings!)
  

* but Ipic’s exposure as co-guarantor was reportedly only US$1.75bn. The US$1.4bn is reflected in 1MDB’s 2013 and 2014 accounts.

** options to buy a 49% stake in future listing of the power assets.

*** the US$1.5bn GIL fund investment. (This was invested from part of the funds raised from 1MDB’s bond issue of US$3.0bn to finance the Tun Razak Exchange project). But why would 1MDB need Ipic to guarantee its “investment”?

Oh, what a mess; what a tangled web they wove. All this sounds highly questionable, even suspicious.

The Edge raised a pertinent question: if 1MDB could make all these payments totalling US$3.5bn to Aabar BVI, why couldn’t it just settle the US$3.5bn in bond borrowings?

To this, Arul claimed that 1MDB managed to extract some benefits from Ipic, such as getting Ipic to  guarentee the Cayman Islands ‘investment’ and the US$1.5bn GIL investment fund.

But why were the funds placed in such a high-risk Cayman Islands ‘investment fund’ in the first place? And why does 1MDB need to keep asking others to guarantee its own ‘investments’ in exchange for hefty deposits?

The crux of the matter is, who ultimately sapu-ed received this US$3.5bn that went to the (celup/imitation) Aabar in Petaling Street the British Virgin Islands?

In the interview, Arul admitted that “what Ipic can sue is on the US$6.0bn” made up of:

• bonds – US$3.5bn (now gone missing due to the payments to the imitation Aabar?)
• interest due – US$1.35bn
• “top-up deposits” – US$1.15bn (to guarantee the Cayman and GIL investment funds?)

“But that is the extent of the liability of RM24bn (US$6.0bn). And Ipic will only call on the indemnity over time as the bonds mature only in 2022. It’s not RM24bn coming up today and it’s not MR40bn as Tony Pua says,” said Arul Kanda.

(Moody’s Investors Service has reportedly estimated 1MDB’s total liabilities at over RM30bn – a colossal sum by any standards.)

Arul listed four points to shore up confidence in 1MDB:

• 1MDB had the BVI Certificate of Incumbency showing the Aabar name to support its payment.
• 1MDB had obtained guarantees for the amouts it owed.
• Ipic had given 1MDB US$1.0bn in June 2015, even though 1MDB “was going through distress”.
• The US$1.4bn security deposit was reflected in 1MDB’s 2013 and 2014 accounts. The options termination and other payments to Aabar (the celup one?) were also reflected in the 2014 accounts. For what it’s worth. (The external auditors have some explaining to do here.)

Since April, however, something has gone seriously wrong for Ipic to seek arbitration for US$6.5bn now and not “over time” as Arul had intimated.

By the way, has anyone been investigated and charged in any Malaysian court for any of this?