Malaysia's indebted and controversy-ridden state investor 1MDB will be left as a skeletal structure and possibly dissolved under a debt repayment plan in which most of its assets will be sold, sources with direct knowledge of the matter said.
The power and property fund, a pet project of Prime Minister Najib Razak with assets worth $14 billion, was hit by losses last year and nearly defaulted on a loan payment. The near-miss drove down the ringgit currency (MYR=) and Malaysian government bonds and prompted calls from opposition leaders to make the fund's accounts more transparent.
The state fund's 42 billion ringgit ($11.6 billion) debt includes a $3 billion bond sale in 2013 that was one of the largest global issues from Southeast Asia.
Under the aggressive restructuring plan, crafted by new boss Arul Kanda and blessed by the government, the fund will sell 80 percent of its power unit Edra Energy via a stock market listing, three sources with direct knowledge of the situation told Reuters.
More than 18 billion ringgit of 1MDB's debt linked to its power assets would go under Edra Energy ahead of the listing, which is due to be kickstarted in 6-9 months time, the sources said.
The fund, which has Najib as chairman of its advisory board, will also sell the bulk of its land assets and stakes in two high-profile property projects, Tun Razak Exchange (TRX) and Bandar Malaysia, after splitting them into separate entities, as already partially indicated in a strategic review unveiled last month.
The Finance Ministry, which is headed by Najib and is the sole owner of 1MDB, did not respond to a request for comment.
"HOT POTATO"
1MDB said in an email that Edra Energy would be "monetized" in 2015 and the TRX and Bandar Malaysia projects would be ultimately owned by the finance ministry.
This process would turn 1MDB into a skeletal structure that could eventually be dissolved completely, said one person, who spoke on condition of anonymity because of the sensitivity of the issue.
"It's become a hot potato for the Malaysian government. It was just too much to handle," said another source.
1MDB said on Wednesday that its plans to list Edra Energy were on track. It said the fund would re-submit an application for an initial public offering after cancelling a submission made in November. It did not elaborate.
Arul, appointed in January to revamp the fund, has carried out a strategic review of 1MDB's finances and announced last month the fund would monetize Edra Energy this year, run real estate projects as standalone entities and sell assets to repay lenders. He did not disclose any financial details.
A respected former investment banker who was previously at Abu Dhabi Commercial Bank, Arul was brought in to see if it was possible to salvage the fund, but decided it was best to wind down its businesses after carrying out a thorough 6-week review.
"A KNOWN UNKNOWN"
1MDB, which analysts view as a cross between a sovereign wealth fund and a state-backed strategic fund, was established in 2008 as the Terengganu Investment Authority with 10 billion ringgit to manage oil royalty payments to the resources-rich northern state of Terengganu.
But as Najib came to power in 2009, he renamed it 1MDB and turned it into a fully-fledged investment fund.
1MDB expanded by purchasing pricey power assets from Malaysian tycoon Ananda Krishnan and gaming-to-plantation conglomerate Genting Bhd (GENT.KL), and large plots of land in the capital and other regions of Malaysia, racking up debt in the process until it plunged to a loss last year.
Krishnan also lent 2 billion ringgit to 1MDB last month, pulling the fund back from the brink of the possible default on a bank loan payment, sources said. Officials at Krishnan's investment vehicle Usaha Tegas were not immediately available to comment.
Political leaders, including former prime minister Mahathir Mohamad, have demanded an inquiry into 1MDB's finances and are also calling on the government to explain transactions that they allege resulted in siphoning off public funds.
Najib said on Wednesday he had instructed the Auditor General to independently verify 1MDB's accounts after the allegations. But question marks remain on whether investors would be interested in the fund's IPO and sale plans.
"On 1MDB, it really boils down to the lack of transparency which cements it as a known unknown," said Weiwen Ng, an ANZ analyst based in Singapore.
"Greater transparency and accountability of the 1MDB issue would certainly help for future sales of assets and any such possible restructuring."
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