Epic collapse of 1MDB-IPIC debt-asset swap deal means the entire rationalisation exercise has failed and a multi-billion dollar bailout by the Ministry of Finance is in the works

Over the past few months, the Prime Minister and his cheerleading cabinet as well as 1MDB President Arul Kanda were bragging about how successful the 1MDB rationalisation exercise was.

Arul  Kanda  when  responding  to  media  enquiry  if  he  was  leaving  1MDB,  said “What  I  said was that my work was done with the successful rationalisation” on 31 March 2016.

Yesterday’s  announcement  by  International  Petroleum  Investment  Corporation  (IPIC)  which accused  1MDB  of  failing  to  honour  the  terms  of  the  US$4.7  billion  debt-asset  swap  deal proved  their  boasts  to  be  ludicrously  premature.This  follows  confirmation  that  US$3.51 billion  of  1MDB’s  funds  have  be  siphoned  to  a  fraudulent “Aabar  Investment  PJS  Limited”which was established in the British Virgin Islands (BVI).

All Arul Kanda has achieved to date is to sell Edra Global at RM9.93 billion which represents a  loss  of  RM2.27  billion  as  the  assets  were  acquired  for  RM12.1  billion.    The  loss  widens further if one were to take into account the  dividends received versus the interest paid on loans taken for the purposes of the acquisition.

Even for the sale of 60% of Bandar Malaysia, only a refundable deposit of RM741 million is paid.    The  deal  is  only  expected  to  be  completed  by  June  2016.    However,  there  is  no assurance that all the terms of the deal can be met, including the purchasers ability to raise the necessary funding to pay RM7.41 billion for the 60% stake.

However,  the  most  critical  anchor  to  the  entire  rationalisation  exercise –  the  debt-asset swap agreement with IPIC involving up to US$4.7 billion is by far the biggest component in the  rationalisation  plan.The  US$4.7  billion  included  US$3.5  billion  of  2012  bonds,  US$1 billion  of  IPIC  advance  provided  in  June  2015  and  up  to  approximately  US$200  million  of interest payments during the course of the year.

Its failure not only now places 1MDB itself at risk, but now involves a bailout by the Ministry of Finance (MOF).

As IPIC has clearly announced to the London Stock Exchange, “1MDB and MOF continue to be  bound  by  their  respective  obligations  under  the  terms  of  the  Binding  Term  Sheet, including their continued indemnification of IPIC and Aabar for any non-performance under the  Binding  Term  Sheet  and  in  relation  to  any  claims  which  may  be  made  against  IPIC pursuant  to  the  guarantees  entered  into  by  IPIC  in  respect  of  certain  1MDB  group  bond issuances.”

This  clearly  means  that  should  1MDB  fail  to  repay  up  to  US$4.7  billion  to  IPIC  and/or  the bondholders, then the MOF has to fork out the difference based on the indemnity provided by the MOF in the debt asset swap agreement.

When I had pointed out this sleight of hand by 1MDB and MOF in June last year, 1MDB had angrily refuted my warnings and concerns.

“...it  is  irresponsible  of  Tony  Pua  to  suggest  that  the  recent  binding  term  sheet  between 1MDB and IPIC, a commercial transaction, has resulted in further guarantee obligations by the government of Malaysia,” 1MDB protested.

It appears that 1MDB could only lie about the hidden guarantee by MOF for 10 months.  We now  know  clearly  that  with  the  spectacular  failure  of  the  debt-asset  swap  deal,  the Malaysian tax-payers will be called upon to foot 1MDB’s bills.

The  Parliamentary  Public  Accounts  Committee  has  already  established  the  fact  that  the Government  is  obligated  via  explicit  and  implicit  guarantees  provided  for  US$3.15bn  and RM5.8 billion of 1MDB borrowings or approximately RM18 billion in total.

Now with the unravelling of the IPIC deal, the MOF is now exposed to another US$4.7 billion of  1MDB  liabilities  or  approximately  RM18.5  billion.    Hence  the  rakyat’s  exposure  to  the shenanigans in 1MDB amounts to an epic RM36.6 billion.

Dato’  Seri  Najib  Razak  can  no  longer  escape  the  need  to  explain  the  spectacular  disaster that is 1MDB which has happened under his watch.  He must explain how is 1MDB going to fund the immediate repayment of US$1.1 billion demanded by IPIC.

He  must  also  explain  why  the  Auditor-General  has  been  unable  to  confirm  US$7  billion  of 1MDB’s transactions, cash and assets overseas due to the complete lack of cooperation from 1MDB. Or else, what is the Prime Minister really hiding?