1MDB: So many questions begging for answers

This reader highlights four major issues relating to 1MBD bonds that all Malaysians should take cognisance of.

COMMENT

By TK Chua

First is with regard to guarantees (whether letter of guarantee or letter of support) purportedly provided by the government of Malaysia.

The second issue is why 1MDB has issued the bonds at a discount (which I gathered from 1MDB’s press statement recently).

The third issue is why the money raised from 1MDB bonds was parked at Cayman to earn “income”?

And fourth, why was 1MDB so eager and quick to acquire energy assets (the IPPs) when most of the concessions were about to expire?

Lawyer Tommy Thomas has provided a very good comment on what constitutes guarantees from the legal point of view.

Government guarantees are worth a lot of money. Once a sovereign government has provided the guarantee to any entity issuing the bonds, the risk of default is technically reduced to the “sovereign level”.

In this case for example, why should 1MDB bonds incur a higher interest rate than long-term Malaysian Government Securities (MGS) when the risk associated with the bonds has been reduced by the government guarantee?

Returns should commensurate with risks. This is the principle applied all over the world. Have we found out how much higher an interest rate 1MDB bonds are paying when compared with long term MGS? Was the rate fair and in line with what others were paying? It seems to me that government guarantees are worth nothing even though they have substantially reduced the risks of the bonds.

The second point centres on why 1MDB issued the bonds at “discount”? This was the answer given by 1MDB when concerns were raised over the high professional fees and commissions paid. I agree bonds can be issued at discounts or premiums but this must be linked to prevailing market interest rates. Why did 1MBD issue the bonds at discount? Was it because the coupon rate of 1MDB bonds was lower than the market interest rate of equivalent risks?

It does not matter whether the bonds were issued at discount or premium. Ultimately we are all only interested in knowing the effective rate of 1MDB bonds.

1MDB must disclose the effective rate after taking into consideration the coupon rate, the discount given and the professional fees charged. This is the only way we would know the total cost of borrowing. This is the only way we would know whether or not 1MDB is paying a higher rate than others of equivalent risks.

The third point is putting money in Cayman. Why did 1MDB borrow excessively but only to put the money in Cayman? What is the logic here? If 1MDB thinks it could earn higher income than borrowing cost incurred, why didn’t 1MDB bond investors put their money in Cayman directly instead of buying 1MDB bonds? I hope some hotshot financial wizard in Goldman Sachs and 1MDB could explain this to me.

The fourth point is about 1MDB going on an asset buying spree and the allegations of overpaying for some of these assets.

One of the points raised by many is why the need to acquire IPPs at a premium price when many of the concessions are about to expire. I am sure the IPPs have worked out their returns of investment which includes “residual” value when concessions expire. I believe 1MDB should be in a position of strength when negotiating to buy these assets.

I hope the issues raised by various quarters can be answered satisfactorily by 1MDB and the Treasury.

TK Chua is an FMT reader