SIGNS EMERGE NAJIB & CO WILL LOSE ARBITRATION FIGHT WITH IPIC: 1MDB BONDS RALLY BUT US$6.5 BIL LOSS WILL SINK MALAYSIA’S ECONOMY

KUALA LUMPUR – Bonds of 1Malaysia Development Bhd (1MDB) have surged despite broadening investigations into the state investment fund’s activities, as investors bet on the strength of its backers.

International Petroleum Investment Co (Ipic), Abu Dhabi’s sovereign wealth fund, paid the coupon on 1MDB’s US$1.75 billion (S$2.43 billion) of October 2022 notes as the debt’s co-guarantor days after a default in April.

JPMorgan Chase said the debt could rally further to bring its yield premium closer to that of Ipic. Actively traded 1MDB bonds had an extra yield of 220 basis points more than US Treasuries on Oct 14, compared with 101 for Ipic.

1MDB’s notes have jumped 18 per cent from their low in late April, paying off for investors willing to keep tabs on an organisation mired in global investigations into alleged corruption and money laundering.

The next test for the bulls will be today, when the next semi-annual coupon for October 2022 bonds is due. While it is paying interest for now, Ipic is still seeking US$6.5 billion from 1MDB and the Malaysian government for an alleged breach of contract related to a May 2015 deal, a claim that is in arbitration.

“The debt probably rallied because of trading on the strength of the guarantee,” said investment director James Lau at Pheim Asset Management.

With the ongoing disputes, investigations and plans to wind down the state fund, there is still risk in the long term over “whether the debt will be repaid”, he added.

The 1MDB scandal has contributed to the weakening of Malaysia’s ringgit by 22 per cent over the past two years amid the nation’s weakest economic growth since a 2009 contraction. Fitch Ratings in May said there was a rising likelihood that 1MDB’s debt will affect the sovereign’s balance sheet.

Singapore’s monetary authority last week fined DBS Group Holdings, UBS Group and Falcon Private Bank’s branch for breaches in anti- money laundering rules.

Political opponents have criticised Malaysian Prime Minister Najib Razak, who led 1MDB’s advisory board until the end of May.

Datuk Seri Najib and the state fund have denied any wrongdoing.

1MDB declined to comment on the next coupon payment or the status of its arbitration. It said in July it would continue to implement rationalisation plans and remained able to honour its obligations.

There is a grace period of five business days after the coupon due date, according to the October 2022 bond prospectus.

– BLOOMBERG