Credit Markets: 1MDB in Debt-Payment Spat -- WSJ
April 23 2016 - 3:03AM
Dow Jones News
By Mia Lamar
Troubled Malaysian government investment fund 1Malaysia
Development Bhd. must make a $50 million debt payment on Monday as
it faces the possibility of a default that could trigger defaults
on billions more of its debt.
The overdue payment is on a $1.75 billion bond issued by 1MDB in
late 2012. If the bond is ultimately declared in default, the
subsequent fallout could hurt the outstanding debt and the currency
of Malaysia. It also could hurt the bonds of 1MDB and those of its
close partner, the Abu Dhabi sovereign-wealth fund, International
Petroleum Investment Corp., known as IPIC, according to a memo from
1MDB to Malaysia's Finance Ministry and a person familiar with the
matter.
A default is unlikely and both 1MDB and IPIC have the cash to
make the payment. But a standoff between the two, over which should
make the payment, puts a spotlight on the potential impact a
continuing scandal at 1MDB could have on the Malaysian government.
And it signals a split between the two government funds that could
force 1MDB to come up with significant amounts of cash or ask the
Malaysian government for help.
The 1MDB sovereign-wealth fund is under investigation in seven
countries, including Malaysia. Global investigators say they are
investigating possible misappropriations of about $6 billion, said
a person familiar with one country's probe. The 1MDB fund denies
wrongdoing.
Under a deal reached last year, IPIC was supposed to make the
roughly $50 million interest payment on the bonds last Monday. The
Abu Dhabi fund agreed to take over interest payments for that bond
as well as the payments for another $1.75 billion bond that it had
guaranteed for 1MDB in 2012. That agreement came after 1MDB ran
short of cash last year, and IPIC agreed to extend an emergency
billion-dollar loan to the Malaysian fund in exchange for
undisclosed assets.
When the payment was due last Monday, IPIC announced it had yet
to receive a portion of the assets and wouldn't make the interest
payment.
This coming Monday marks the end of a grace period for the
interest payment, and as of Friday, 1MDB hadn't said whether it
would make the payment. The government of Malaysia named this
coming Monday as the official default date on the bond in question
if a payment isn't yet made, according to disclosures in offering
documents for an unrelated $1.5 billion sukuk, or Islamic bond,
issued by the Malaysian government this week.
If the payment isn't made, 1MDB said in the bond-offering
document, the bond issue would be in default, and that could cause
other defaults and demands for accelerated payments on other 1MDB
debt, the government said in a supplement Tuesday to the offering
documents.
On its website this week, 1MDB's president said the fund expects
bondholders will be paid. Some ratings firms say IPIC will likely
fulfill its role as guarantor and pay the interest, if called upon
by the bond's trustee.
Moody's Investors Service analyst Christian de Guzman called
default a "nuclear option" that would hurt the reputation and
market access of both IPIC and 1MDB.
He added the standoff so far between the two appears to be a
pressure tactic to get the other to make the payment. "It's really
about making the other side sweat," Mr. de Guzman said.
Moody's doesn't rate the bond in question. But it does have an
investment grade Aa2 on the other bond issued by 1MDB in 2012. The
next interest payment for the other bond is on May 11. That rating
is on review for possible downgrade.
1MDB and IPIC didn't respond to requests for comment.
In its filing Monday, IPIC said it had honored all of its
obligations and blamed 1MDB for failing to satisfy its part of the
bailout deal. 1MDB has said it has satisfied its obligations and
has committed no wrongdoing.
The bond in question doesn't trade much and was issued by 1MDB
around October 2012 to help finance the acquisition of Malaysian
conglomerate Genting Bhd.'s domestic power-generation business.
One big buyer of the debt was Taiwan's Cathay Life Insurance
Co., which purchased around $300 million of the 2012 issue, a
spokeswoman told The Wall Street Journal on Friday. She said Cathay
Life has since reduced its positions to roughly $100 million.
The company, a flagship of Taiwan's largest financial group,
Cathay Financial Holding Co., is "watching the progress on how both
parties work together to lead to the resolution of the event," the
spokeswoman said. "According to the prospectuses, both the issuer
and the guarantor should honor their financial obligations."
The price for the bond tumbled early in the week but later
rebounded. Other 1MDB bonds and Malaysian government bonds were
largely unaffected by the dispute.
--Carol Chan and Jasper Moiseiwitsch in Hong Kong and Carolyn
Cui in New York contributed to this article.
Write to Mia Lamar at mia.lamar@wsj.com
(END) Dow Jones Newswires
April 23, 2016 02:48 ET (06:48 GMT)
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