1MDB defaults on bonds, could need government bailout

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More bad news from 1MDB

The fiscal reputation of Malaysia took another hit as troubled state fund 1Malaysia Development Berhad admitted that it had failed to make an interest payment of $50 million on a $1.75 billion bond issue amid a wider dispute with Abu Dhabi’s International Petroleum Investment Co, the co-guarantor of the bonds.

That default, in turn, caused cross defaults on two of its Islamic bonds, totaling $1.9 billion, 1MDB said in a written statement on April 26.

The defaults weighed on the country’s stock and currency markets and raised concerns that the government may eventually have to spend billions to bail out the fund. The ringgit fell as much as 1.2 per cent, and the cost to protect Malaysia’s sovereign notes with credit-default swaps increased. Malaysian stocks also turned down, with the major index closing down 1.3 per cent on April 26.

Credit ratings agency Moody’s pointed at the heightened risks for Malaysia’s sovereign balance sheet. In January, Moody’s downgraded the country’s rating outlook from positive to stable at A3. The total size of contingent liabilities associated with the Malaysian state fund’s default could be around 2.5 per cent of Malaysia’s GDP, analysts say.

1MDB’s total debt, according to latest publicly available data from 2014, is about $11 billion, around 4 per cent of Malaysia’s GDP, although the fund should have reduced debt through asset sales in the recent past.

1MDB’s non-payment is another blow to Malaysia Prime Minister Najib Razak’s efforts to halt months of political attacks and draw a line under allegations of irregularities found at the fund. A Malaysian parliamentary committee this month identified at least $4.2 billion of unauthorised or unverified transactions by 1MDB, some involving Abu Dhabi companies.

1MDB’s default may prompt other bondholders to demand payment earlier than scheduled, analysts says. Some bonds – particularly the sukuk –  have a clause saying investors can redeem their holdings if 1MDB stops making payments on any other debt. The Malaysian government is expected to make good on the debt it has guaranteed or supported.

Malaysian opposition lawmakers were quick to comment.

Najib Razak “must provide a full and satisfactory explanation on the financial disaster taking place before our eyes and outline the steps which will be taken to remedy the situation,” said Tony Pua, an opposition lawmaker with the Democratic Action Party and a member of the parliamentary committee that probed 1MDB.

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Reading Time: 2 minutes

More bad news from 1MDB

The fiscal reputation of Malaysia took another hit as troubled state fund 1Malaysia Development Berhad admitted that it had failed to make an interest payment of $50 million on a $1.75 billion bond issue amid a wider dispute with Abu Dhabi’s International Petroleum Investment Co, the co-guarantor of the bonds.

Reading Time: 2 minutes

1MDB umbrella
More bad news from 1MDB

The fiscal reputation of Malaysia took another hit as troubled state fund 1Malaysia Development Berhad admitted that it had failed to make an interest payment of $50 million on a $1.75 billion bond issue amid a wider dispute with Abu Dhabi’s International Petroleum Investment Co, the co-guarantor of the bonds.

That default, in turn, caused cross defaults on two of its Islamic bonds, totaling $1.9 billion, 1MDB said in a written statement on April 26.

The defaults weighed on the country’s stock and currency markets and raised concerns that the government may eventually have to spend billions to bail out the fund. The ringgit fell as much as 1.2 per cent, and the cost to protect Malaysia’s sovereign notes with credit-default swaps increased. Malaysian stocks also turned down, with the major index closing down 1.3 per cent on April 26.

Credit ratings agency Moody’s pointed at the heightened risks for Malaysia’s sovereign balance sheet. In January, Moody’s downgraded the country’s rating outlook from positive to stable at A3. The total size of contingent liabilities associated with the Malaysian state fund’s default could be around 2.5 per cent of Malaysia’s GDP, analysts say.

1MDB’s total debt, according to latest publicly available data from 2014, is about $11 billion, around 4 per cent of Malaysia’s GDP, although the fund should have reduced debt through asset sales in the recent past.

1MDB’s non-payment is another blow to Malaysia Prime Minister Najib Razak’s efforts to halt months of political attacks and draw a line under allegations of irregularities found at the fund. A Malaysian parliamentary committee this month identified at least $4.2 billion of unauthorised or unverified transactions by 1MDB, some involving Abu Dhabi companies.

1MDB’s default may prompt other bondholders to demand payment earlier than scheduled, analysts says. Some bonds – particularly the sukuk –  have a clause saying investors can redeem their holdings if 1MDB stops making payments on any other debt. The Malaysian government is expected to make good on the debt it has guaranteed or supported.

Malaysian opposition lawmakers were quick to comment.

Najib Razak “must provide a full and satisfactory explanation on the financial disaster taking place before our eyes and outline the steps which will be taken to remedy the situation,” said Tony Pua, an opposition lawmaker with the Democratic Action Party and a member of the parliamentary committee that probed 1MDB.

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