1MDB cash flow under pressure

1Malaysia Development Bhd’s half-year interest payment on a US$3 billion bond issued by 1MDB Global Investments Ltd is due in March. – The Malaysian Insider file pic, February 28, 2015.

1Malaysia Development Bhd’s (1MDB) failure to get a RM3 billion cash injection from the Finance Ministry will put more pressure on its cash flow, as it has interest payments of some RM750 million due in the next three months on the four RM28 billion worth of bonds it has issued.

Sources have confirmed that the Cabinet had at last week’s meeting deferred the approval of the RM3 billion, as it wanted 1MDB to provide more details and clarity on its finances and business.

A US$66 million (RM238 million) half-year interest payment on the US$3 billion bond issued by 1MDB Global Investments Ltd is due in March. The other half-year interest payment amounting to US$105 million (RM378 million) is due in May for the two bonds totalling US$3.5 billion raised to buy its power assets.

1MDB has to pay interest twice a year on these bonds. The total interest payment each year is US$342 million (RM1.23 billion).

The fourth bond is a local one issued in 2009 – the RM5 billion raised for the joint venture with PetroSaudi Holdings (Cayman) Ltd, which was subsequently aborted. 

1MDB pays an annual interest of 5.75% or RM286 million in two tranches; the first tranche of RM143 million is due soon. This bond is guaranteed by the government.

The RM750 million is just interest due for the bonds and 1MDB has other types of borrowings. 

The total interest payments on all its borrowings between now and June is about RM1.2 billion. At its financial year end on March 31, 2014, its total borrowings stood at RM42 billion and its interest servicing in that financial year was RM2.4 billion.

1MDB’s next financial close is at the end of this month and its total debts are expected to be higher by then. On September 1, 2014, it took a one-year US$975 million (RM3.5 billion) term loan from Deutsche Bank Malaysia.

Pressure is, therefore, mounting on 1MDB to demonstrate its ability to honour all its debt obligations on time.  

The risk premium on the US-dollar-denominated 1MDB bonds that are traded has risen in the past few weeks with prices falling near to junk bond status despite the bonds being rated A- by Standard & Poor’s, which is four levels above non-investment grade.

“The 1MDB bonds are trading wide of (at a discount to) similarly rated bonds. For example, Petronas 22, which matures in 2022, one year before the 1MDB bond, has a spread to US Treasuries of only 135 basis points (compared with around 400 basis points for 1MDB),” said Tim Condon, managing director and head of Asia research at ING Groep NV in Singapore.

What is so wrong about the 1MDB bonds for investors? “Bad headlines, notably the reports of its loan servicing difficulties,” Condon said.

One factor underpinning the negative publicity is 1MDB’s lack of operating cash flow to service its mounting debt.

This was worsened by the two extensions sought for a RM2 billion loan to a consortium of local banks, which was finally resolved by a loan provided by tycoon T. Ananda Krishnan.

1MDB’s president and group executive director Arul Kanda Kandasamy acknowledged as much when announcing the group’s intention to monetise its assets, including through land sales to ease its cash flow constraints, in its February 18 statement: “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 (their) debt and infrastructure obligations.”

The US$3 billion 1MDB Global Investments Ltd note with 4.4% coupon due March 2023 – which has a “letter of support” or implied guarantee from the government of Malaysia – closed at a record low of 86.936 cents against its nominal value of US$1 on February 12.

Closing at 89.077 cents on the dollar last Thursday (February 26) or 6.145% yield, the 1MDB debt papers have fallen 13.5% from its recent high of 102.98 cents on the dollar on October 16, 2014. Over the same period, the ringgit has weakened about 9% against the US dollar.

The unfavourable bond pricing means higher borrowing cost for any new 1MDB debt issuances.

Sources say 1MDB is still facing questions on whether it breached covenants for the US$3 billion 10-year bond issuance in 2013 arranged by Goldman Sachs, for which Bank of New York Mellon is trustee.   

More than US$1 billion of the US$2.717 billion net proceeds raised by 1MDB Global Investments Ltd had been used for working capital and debt repayment instead of what the money was originally raised for.

According to bond documents, the total proceeds are intended as seed capital for investment in Abu Dhabi Malaysia Investment Co Ltd (ADMIC), a proposed joint venture between 1MDB and Aabar Investments PJS to develop the Tun Razak Exchange.

“We cannot comment due to client confidentiality,” a London-based spokesperson for Bank of New York Mellon replied to The Edge’s question of whether 1MDB or any of its units were in breach of bond covenants.

Bank of New York Mellon also declined to say whether the use of bond proceeds for debt servicing was allowed, if there was need for it to act on behalf of bondholders or if bondholders were concerned with the way the 1MDB debt papers had fallen in value in recent weeks.

Arul Kanda also cited confidentiality agreements when asked about the issue in January, but said that there would have been a public announcement if there had been a breach in covenant.

About 53% or RM22.05 billion of 1MDB’s RM41.87 billion debt as at March 31, 2014, was US dollar-denominated, according to its 2014 annual report.  

At the time, 1MDB had RM8.33 billion debt due within one year, RM4.5 billion debt due after one year but within five years and RM29.04 billion debt due in more than five years. 

For FY2014, 1MDB’s debt servicing charges were RM2.4 billion, up from RM1.62 billion in FY2013. – The Edge Weekly

- TMI