CHYYY Cathay Financial Holding Company (PK)

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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