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Monday, January 18, 2021

PM Najib admits that 1MDB model was flawed and too idealistic

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Yesterday, PM Najib had a dialogue with a bunch of high powered financial people in New York where he discussed the following:

Najib acknowledged that 1MDB’s business model was flawed as it was too idealistic and went into heavy debt financing – with only RM1mil (not RM1b) paid up capital to undertake huge property development and acquisition of power generation plants.

This is true. He could have used the past govt models of borrowing at Federal Govt level (ala Perwaja Steel) and then inject RM5b as shareholders fund into 1MDB instead of borrowing at company level and hence forcing the company to pay back the interests.

As in the case of Perwaja, govts of the past would have just injected more capital into it if the company experiences losses after losses and bailed it out time and again – but this time around, Najib’s govt resisted this temptation and forced 1MDB to solve its own problems.

However, borrowing at Federal Govt level could have breached the 55% Debt to Capital ceiling imposed by the govt on itself and stopped other capital development projects in our yearly budget.

– Najib said the business plan got derailed after the planned Edra Energy IPO was delayed and subsequently cancelled and this got 1MDB into cash-flow trouble.

Actually, PM could have made this IPO a success if he had followed Tun M model and had instructed the Energy Commission to award 1MDB the highest tariffs among the IPP and/or extend the IPP concessions – instead, 1MDB bid the lowest tariffs for all their projects – hence making it less profitable and less attractive as an IPO.

Other than this, the IPO was also delayed due to incomplete submission amidst very stringent requirements from the Securities Commission. Govts of the past would have forced the SC to simply approve this IPO and forced all the govt-linked funds to subscribe for the Edra Energy IPO.

Again, PM Najib’s govt resisted this temptation.

– Najib said the 1MDB rationalisation scheme to ease its cash flow problems and reduce debt is on track and he had committed to the Cabinet that the problems would be substantially resolved by the end of this year. “So I’m quite confident that by the end of the year, we’ll be able to show that 1MDB is a company that is able to go through the process of rationalisation with a massive reduction of debt,” he said.

1MDB had done quite a bit over the past year after Arul Kanda took over as President. A recent update by 1MDB states that:

  • 1MDB has successfully sold, in 2015, over RM 1 billion of land in TRX. This is actually more as it did not seem to have included the equity accounting of the 60-40 JV at TRX with Lend Lease worth RM8b earlier this year which would have meant another RM3.2 billion “sales” to 1MDB for the year.
  • 1MDB has also called for tender for the sale of the Penang land worth RM1 billion and the Pulau Indah land worth RM300 million – but this seems to have just started.
  • Final, binding bids will be received from domestic and international shortlisted bidders for both Edra Energy and Bandar Malaysia between mid-end October 2015, with Sale & Purchase Agreements (SPA) for both assets being executed by December 2015
  • 1MDB has consistently met, with no default, its interest service and principal repayment obligations, to both foreign and domestic lenders.

In fact, Arul Kanda also confirmed in an interview with BBC earlier this week that the end of the year target for rationalization is on schedule – but he dropped hints that in January and February, 1MDB could even post a surplus!! Good luck to Arul.

– PM Najib also declared that there would be an announcement “in the coming days” on the significant reduction of 1MDB debt to the tune of RM16bil.

This appears related to the USD4.5 billion asset-debt deal signed with the Abu Dhabi government fund IPIC in June 2015. USD 1 billion has already been paid to 1MDB with USD3.5 billion remaining. It has been reported that this deal involved transferring USD4.5 billion of 1MDB’s financial assets (non-land and not the power plants) to IPIC and in return, other than the USD1 billion already paid, IPIC will take over USD3.5 billion (about RM16 billion) of 1MDB’s debts.

These USD4.5 billion financial assets of 1MDB has been invested in various partnerships with IPIC and its subsidiary, Aabar capital and includes the alleged missing USD1.4 billion payment to IPIC and another USD1 billion payment missing to IPIC – both incidents was alleged over the past month by Wall Street Journal in its articles.

Such financial assets also includes the alleged BSI Singapore and Cayman Island funds that were allegedly units but not cash.

Now, if IPIC and 1MDB announces the full signing of this agreement in the coming days as what PM Najib told in New York and CLEARLY list down all the 1MDB financial assets to be sold to IPIC that Najib’s critics continually alleges to have gone missing, this essentially PROVES that these assets have not gone missing – as confirmed by 1MDB auditors KPMG and Deloitte.

If these financial assets are missing as alleged by the critics, then why would IPIC essentially pay USD4.5 billion to take them over?

– Najib also said that there are two very real and huge proposals on the table to take off the Edra assets, domestically as well as foreign – two foreign sources combining to make a very attractive offer.

1MDB had paid RM18 billion (RM12b cash and RM6b to assume the debts) to buy over these power assets. It has been reported by the Edge and also by other sources that the price offered by these two foreign sources combining to make a very attractive offer could be above RM20 billion – meaning that 1MDB could even make a profit from this.

So much for the 1MDB critics who continually allege that 1MDB overpaid RM2 billion for all these power assets. Instead of over-paying RM2 billion, it is possible that 1MDB could make RM2 billion – and this would be a big slap to the critics.

However, this deal could come in for a lot of public criticism soon as there may be public protests against selling of domestic IPPs (5 out of Edra’s 15 plants are in Malaysia) to foreign interests. Let’s see how 1MDB and govt handle this.

I am happy that PM Najib has admitted to 1MDB being flawed but has taken responsibility to solve it. It is clear that PM Najib and 1MDB is working hard to keep to their commitments for a year-end resolution to 1MDB’s debt issue and its rationalization plans – without a need for a government bail-out as was the case for similar trophy projects in the past.

And as time passes by, it seems that we will get a much clearer picture of the actual 1MDB situation and story.

If the above 1MDB rationalization steps is completed in the coming days and months and 1MDB actually makes money – with a surplus in January and February next year – as hinted by Arul Kanda, what would the critics say now?

Would they say sorry? Or would they grudgingly say “well done” to Najib, Arul and to 1MDB?

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