IMDB unveils changes to structure, seeks to improve cashflow
PETALING JAYA: 1Malaysia Development Bhd (1MDB), which has drawn attention for its debts and yet-to-be-listed energy division, will not undertake any new investments or projects and raise new borrowings.
In an announcement after a strategic review of its business, the government-owned strategic fund with total liabilities of RM49bil as of March 31, 2014 said that it might sell assets including its land in Air Itam, Penang, and Pulau Indah, Selangor, and look at options on monetising the Edra Energy, which is its power generation division.
As for its real estate projects in Tun Razak Exchange (TRX) and Bandar Malaysia, the federal government-owned fund will sell land development rights or enter into profit-sharing joint ventures.
It said that similar to Edra Energy, the subsidiaries developing the TRX and Bandar Malaysia would be run as standalone entities with independent governance structures and responsibility for their own operations and finances.
As for the listing of its power assets that was earlier scheduled to be in the first quarter of this year, 1MDB gave no indication if the plans for a public offer of Edra Energy shares was still on track. It only stated that the plans to monetise the power genration division in 2015 was still on.
“Edra Energy will be monetised in 2015, with a portion of the proceeds being invested in the business for future growth and the remainder going towards repayment of 1MDB’s short-term debt,” it said in a statement.
On its debt, for which the fund has come under criticism from various quarters for the high fees incurred in raising new money, 1MDB said that it would only embark on financing non-recourse project financing.
“The company will now focus on its core businesses. No new investments or projects will be undertaken. Furthermore, no new debt will be raised except in order to refinance existing debt, meet existing liabilities, and/or on a non-recourse, project finance basis, as needed,” 1MDB stated.
“Maturing debt is to be met via refinancing from best available sources or repaid from sale of land development rights, raising of external equity from joint ventures and/or outright asset sales,” it added.
President and group executive director Arul Kanda Kandasamy (pic), in commenting on the strategic review, admitted that the fund’s debt-financed capital structure was no longer appropriate for the company.
“We recognise that our debt-financed capital structure is no longer appropriate for the company, and intend to take measures to ensure that 1MDB and the standalone entities are well positioned to service debt and infrastructure obligations ... there is a need for more direct matching of assets and cashflows,” he said in a statement.
He said TRX and Bandar Malaysia would sell land development rights and/or enter into profit-sharing joint ventures, for example, with government-linked investment companies as well as with Malaysian and international private sector companies that could contribute not only development expertise but also equity and debt to finance specific projects.
“We expect to implement these plans over the next 12 months, and will provide periodic updates on our progress,” he said.
Arul took over the helm of 1MDB on Jan 5 and initiated a strategic review of its businesses. 1MDB has come under scrutiny because of its RM49bil in liabilities as of March 2014 of which RM42bil are long-term debts as it took up large borrowings to built up a portfolio of power plants. To match the liabilities, it had assets of RM51.4bil.
But a substantial portion of its assets was in the form of valuable land that were re-valued several times. Hence the only source of substantial cashflow was from its power assets that were acquired at a premium.
To underline its cashflow situation, last week it settled a RM2bil debt tied to its acquisition of the power assets from Powertek in 2012 due to several local banks after several extensions.
1MDB has also come under flak for its acquisition of some 1,000 acres in Air Itam, Penang, and 310 acres in Pulau Indah, Klang. Both acquisitions came up to about RM1.3bil.
1MDB said that both the Air Itam and Pulau Indah land would be monetised through joint ventures or outright sale.
“Since its inception, 1MDB has systematically built high quality businesses in the energy and real estate sectors. As has already been achieved with Edra Energy, we believe this is the right time to establish TRX and Bandar Malaysia as independently managed companies, with full autonomy and accountability for their operational and financial performance.
“We believe this is the best way to realise full value from these investments for all stakeholders,” Arul said.
He added that while options are being pursued with respect to the monetisation of Edra Energy, ownership of its real estate assets must ultimately remain with the Finance Ministry, 1MDB’s shareholder.
“These projects are crucial to the socio-economic development of the country in general and Kuala Lumpur in particular, with TRX and Bandar Malaysia expected to generate, over time, gross development values of RM40bil and RM150bil respectively,” Arul added.
Arul came on board 1MDB when the fund’s listing of its energy division was uncertain, it had huge amounts of money parked outside the country with little-known asset management companies and under intense pressure from politicians seeking a higher degree of transparency.
Arul gave a series of interviews promising better disclosure and the statement yesterday was the first major announcement on its future direction.
THE STAR
Malaysia’s 1MDB to break up assets, signaling wind-down plan
KUALA LUMPUR/HONG KONG (Feb 18): 1Malaysia Development Bhd., set up by the government five years ago to build infrastructure with borrowed money, will break up its assets, winding down after drawing political criticism and almost failing to repay loans.
The state investment company won’t undertake any new investments or projects after it sets up standalone entities for its two major property projects and raises cash from selling its power business, it said in a statement in Kuala Lumpur today. 1MDB will also sell or form joint ventures for other land it holds, signaling it plans to wind down.
1MDB, whose rising debt had drawn criticism from opposition lawmakers and former Prime Minister Mahathir Mohamad, flirted with default earlier this month after delaying payment on a 2 billion ringgit ($557 million) loan.Fitch Ratings has said the country’s contingent liabilities such as 1MDB’s borrowings are weighing on the sovereign rating outlook.
“1MDB’s purpose is to serve as a catalyst, developing assets and projects of strategic importance, with a view to creating maximum value for the economy,” the company said. “Having achieved this, 1MDB will not undertake any new investments or projects, and we have developed a clear strategy for each of our existing businesses moving forward.”
1MDB, whose advisory board is headed by Prime Minister Najib Razak, said it expects to implement the plans over the next 12 months.
Oil Origins
Its $3 billion of 4.4 percent 2023 bonds rose 0.6 cents, the most in two weeks, to 87.5 cents on the dollar as of 5:20 p.m. in Kuala Lumpur, according to prices compiled by Bloomberg. The notes were sold to investors at par, or 100 cents on the dollar, in March 2013.
The company has its origins in Terengganu Investment Authority, which was created in 2009 to invest oil royalties from the state of Terengganu. When Najib became prime minister that year, it was renamed 1MDB, became a national entity and its funding source was changed to government-backed debt instead of oil income.
It built an energy business by acquiring assets from Malaysian billionaire T. Ananda Krishnan and Genting Bhd. (
Financial Dashboard), and planned a new financial district in Kuala Lumpur known as Tun RazakExchange with land purchased from the government.
Financial Dashboard), and planned a new financial district in Kuala Lumpur known as Tun RazakExchange with land purchased from the government.
The company came under scrutiny in parliament in 2013 after singling out Goldman Sachs Group Inc. to oversee the sales of $6.5 billion of conventional dollar bonds. Opposition politicians said the amount the U.S. investment bank made in commissions and trading gains were excessive. Goldman Sachs made about $500 million for managing the sales, a person familiar with the matter said in May 2013.
Not Appropriate
1MDB’s borrowings climbed to 41.9 billion ringgit in the year ended March from 36.2 billion ringgit in the previous period, it said in November.
“We recognize that our debt-financed capital structure is no longer appropriate for the company, and intend to take measures to ensure that 1MDB and the standalone entities are well positioned to service debt and infrastructure obligations,” President and Group Executive Director Arul Kanda said in the statement.
Kanda was hired last month to head the strategic review. He defended 1MDB’s credentials as a borrower in an interview with Bloomberg News last month, saying the company had never defaulted.
Mahathir, who governed Malaysia from 1981 to 2003, said in November that 1MDB is only serving to increase the nation’s debt and the country would be fine without it.
Power IPO
1MDB is preparing for an initial public offering of its power-plant assets this year, people with knowledge of the sale said in November. The company said today a portion of the proceeds from the monetization of the energy business will go toward repayment of short-term debt.
The company’s two major real estate projects, Tun Razak Exchange and Bandar Malaysia, will be run “with independent governance structures, and responsibility for their own operations and finances,” it said today. The new entities will sell land development rights or enter into joint ventures in part for financing projects.
“Of concern really would be what is the market valuation for each asset vis-a-vis for debt that was taken to acquire,” said Geoffrey Ng, an adviser for strategic investments at Fortress Capital Asset Management Sdn. Bhd. in Kuala Lumpur, which oversees about 1 billion ringgit. “It is one thing to say that the assets will be broken up and monetized, but would that be sufficient to cover the financing that was taken as a result of these assets?”
The Tun Razak Exchange financial district is being constructed on 70 acres of land near the Petronas Twin Towers in downtown Kuala Lumpur. Named after Najib’s father, who was the country’s second prime minister, the development has a projected sales value of 40 billion ringgit.
Bandar Malaysia, located three kilometers away, is a 495- acre mixed-use project that will include a terminal for the proposed high-speed train to Singapore. It has a projected sales value of 150 billion ringgit.
THE EDGE
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