MOVE ASIDE DR M – IF NAJIB FAILS TO GET BEIJING CASH, EXPECT A REVOLT FROM THE CIVIL SERVICE: SRC ON THE BRINK OF DEFAULT ON RM4BIL KWAP LOAN AFTER STRING OF SHADY DEALS

An opaque Malaysian state-owned firm is struggling to pay off its huge debts, causing a potential fresh headache for Prime Minister Najib Razak, even as aftershocks from the financial fiasco at 1Malaysia Development Berhad (1MDB) continue to reverberate internationally.

SRC International, set up by Datuk Seri Najib’s government in early 2011 to pursue strategic overseas investments in energy resources, is under pressure to meet interest payments on its borrowings of RM4.3 billion (S$1.42 billion), say government officials and financial executives close to the situation.

While SRC’s debt load amounts to a fraction of the total borrowings at state fund 1MDB, the company’s financial troubles carry a sting for Mr Najib. SRC’s primary funding of RM4 billion came from pension fund Kumpulan Wang Amanah Pencen (KWAP) that represents Malaysia’s mostly-Malay 1.6 million civil servants. A scandal involving KWAP could undermine support from the pro-government civil service.

The big crunch for SRC will come in the first quarter of next year when it will have to start making large interest payments to KWAP for the 10-year loan facility, officials say. A senior KWAP official, who admitted that SRC was struggling with its annual interest payments, noted that next year would “represent a big challenge for the SRC facility”.

A government bailout of SRC or a restructuring of the interest payments owed by SRC to the pension fund could trigger a fresh political headache for the Najib administration, which is still struggling to deal with the 1MDB scandal. 1MDB, at one point, had debts totalling RM51 billion.

• Company set up to pursue energy deals

• • SRC was set up by the Malaysian government in 2011 to pursue energy investments.• Formerly under 1MDB, SRC is now a Ministry of Finance company.• It borrowed RM4 billion (S$1.3 billion) from civil service pension fund KWAP.
  • RM42 million from SRC flowed into Prime Minister Najib Razak’s account in 2013, according to probes. He said he was not aware of this.
  • SRC pays annual interest of RM164 million to KWAP. This will jump to RM660 million next year and RM964 million in 2018, to pay down the principal loan.

“This needs to be resolved and one option being considered is the sale of the company’s assets and liabilities to a new party,” said one financial executive, who has been involved in the corporate restructuring at 1MDB.

Developments at SRC mirror the problems facing 1MDB, where funds raised to pursue strategic investments wound up in the accounts of personalities closely linked to Mr Najib, who is also the Finance Minister, according to widely publicised official probes into 1MDB, including findings by the United States Department of Justice. SRC was formerly a subsidiary of 1MDB but was later hived off to become a company under the Finance Ministry.

In the SRC case, some RM42 million of its funds made its way into Mr Najib’s personal account, according to probes by the Malaysian authorities and US investigators.

Mr Najib said he was not aware of any SRC funds in his account.

In January, Malaysia’s Attorney-General Mohamed Apandi Ali cleared the Premier of wrongdoing in both the 1MDB and SRC cases, saying there “was no evidence to show that the PM had abused his position”.

A review of SRC’s most recent financial accounts does not show any tangible investments into companies involved in natural resources or commodities. Its investments overseas and in Malaysia consist of “quoted shares, bonds, money market and time deposits” which are all lumped together as “available-for-sale investments”.

At end-March 2014, its investment portfolio in Malaysia stood at RM305.6 million, while its overseas investments amounted to RM3.8 billion. But these investments are not generating returns.

The latest accounts available at the Companies Commission of Malaysia show that SRC posted a loss of RM164.5 million for the year ended March 2014 due to high operating expenses and finance charges on its borrowings. The accounts for 2015 and 2016 have yet to be reported.

SRC’s interest payments, which currently amount to just over RM164 million annually, will jump significantly from next year as they will include principal payments, officials say.

The amount owing to KWAP next year is estimated at close to RM660 million and will jump to RM964 million in 2018.

To be sure, KWAP is fully covered. Documents lodged at the Companies Commission of Malaysia reviewed by The Sunday Times show that all of the borrowings and obligations of SRC are guaranteed in full by the Malaysian government.

But a government bailout of SRC or a restructuring of the interest payments owed by SRC to the pension fund could trigger a fresh political headache for the Najib administration, which is still struggling to deal with the 1MDB scandal. 1MDB, at one point, had debts totalling RM51 billion. Malaysian government negotiators are now pursuing a plan for a China-led takeover of SRC assets in return for fresh capital that will help finance the debt owed to KWAP.

This is not the first time that the Malaysian government has turned to China to plug its financial gaps.

1MDB’s Edra Global Energy was sold to China General Nuclear Power Corp for RM17 billion last November. A few weeks later, China Railway Engineering Corp bought a stake in a development called Bandar Malaysia, on the outskirts of Kuala Lumpur, for RM12.4 billion.

Mr Najib is making an official trip to China from tomorrow to Nov 6.

STRAITS TIMES