BY UNA GALANI

Malaysia faces many hurdles in the upcoming $3 billion initial public offering of its sovereign investment vehicle. 1Malaysia Development Berhad  has become a political target for the nation’s opposition after making some poor decisions. Amid the noise, the state fund will have to work hard to interest investors in its energy assets.

The six-year old fund, which counts Prime Minister Najib Razak as an adviser, focuses on strategic investments in property and power. Since 2012, it has spent over 12 billion ringgit ($3.6 billion) acquiring coal and gas-fired power plants in five countries including Bangladesh, Egypt, and Pakistan. Today, 1MDB is Malaysia’s second-largest independent power producer.

Aside from a government guarantee for a fifth of its net debt, 1MDB raises and invests its own capital. Net debt stood at 66 percent of total assets at March 2013. A listing of the energy assets – one of the country’s largest initial public offerings – will help pay down debt and fund new growth.

The problem is that 1MDB has acquired a poor reputation along the way. Rapid expansion prompted it to overpay for energy assets, resulting in a $357 million goodwill writedown during the financial year ended in March 2013. That’s equivalent to 11 percent of what it paid for two acquisitions over the same period. It is expected to take further impairments ahead of a listing.

Two bond issues which raised a total of $4.75 billion in 2012 and 2013 have also proved controversial. 1MDB paid Goldman Sachs unusually high fees and commissions ranging between 9 and 11 percent for the funds. In the absence of a proper explanation, the deals look like poor judgment.

Reducing the state’s shareholding in the energy business to around 20 percent may help to insulate it from some of the criticism from the government’s political opponents. The newish senior management team should also ensure the unit begins to act more like a commercial entity. The business plans to double its net power generation capacity, from around 6,000 megawatts today, within a decade.

Nevertheless, investors in the initial public offering will want assurances the energy business will be better managed in the future than its parent has been in the past.

First published Nov. 6, 2014

(Image: REUTERS/David Loh)

BY UNA GALANI

The empire-building days of 1Malaysia Development Berhad are over. To reduce its near-$12 billion debt pile, the sovereign vehicle spearheading ambitious government projects has promised not to make any new investments and will bring in equity partners. A well-handled revamp of the energy-to-real estate fund, whose advisory board is led by Prime Minister Najib Razak, could restore investor confidence in the country.

Following a strategic review by new chief Arul Kanda, 1MDB will run its three main units as standalone entities. Money will be raised this year from the energy assets, probably through a flotation which had previously been delayed. Government-linked and private partners will be sought for the firm’s two big real-estate projects, which include the development of a big new financial centre in Kuala Lumpur. Other land may also be sold.

Worries about 1MDB have intensified after it recently postponed the repayment of a 2 billion ringgit loan ($553 million). The vehicle said on Feb. 13 that it had finally settled this without providing any details, or explanation for why it took so long.

The opacity has been unnerving: investors had begun to worry that 1MDB had become a contingent liability for the government, even though it is supposed to raise and invest its own capital. Alongside a collapse in the oil price, growing anxiety about the sovereign vehicle has contributed to a 7.3 percent fall of the Malaysian ringgit against the dollar in three months, while the equity market has been one of the worst performers in Southeast Asia.

1MDB hasn’t been an entire failure. It has built a new energy champion for Malaysia and laid the foundations for mega real-estate projects in the capital. However, it has been dogged by controversy, overpaying for assets and forking out high fees on two Goldman Sachs-led bond issues.

The saga has been damaging for the prime minister, who established the vehicle six years ago. It is unclear if he will continue to advise the fund or its units after the restructuring. Either way, if 1MDB can transform itself transparently and effectively, that will be a big boost to Malaysia’s standing.

First published Feb. 18, 2015

(Image: REUTERS/Olivia Harris)

BY UNA GALANI

One of Southeast Asia’s sovereign funds faces a daunting task. The six year-old 1Malaysia Development Berhad was set up to finance big national projects but expanded too fast, took on heavy debts and is now at the centre of a growing controversy. An ambitious restructuring brings both political and financial risks.

The fund which counts Prime Minister Najib Razak as chairman of its board of advisors has pledged to dismantle itself following a strategic review led by new chief executive Arul Kanda. It plans to stop making new investments and raise cash through an initial public offering of Malaysia’s second largest independent power producer. Selling unused land and finding equity partners for real estate projects that include a new financial centre in Kuala Lumpur and a development built around the terminus for a planned high-speed rail link with Singapore should bring in additional funds.

1MDB’s most pressing objective is to pay down net debt, which stood at around 38 billion ringgit ($10.3 billion) in March 2014. In the same year it made a net loss of 665.4 million ringgit, despite booking a gain from the revaluation of its property portfolio. Absent similar revaluations, it also made a loss in the previous two years.

In the past year, 1MDB has already redeemed $2.3 billion of investments it held in the Cayman Islands and settled a 2 billion ringgit loan. A public offering of an 80 percent stake in its energy unit – which carries debt of around 18 billion ringgit – was initially expected to raise 11 billion ringgit. However, previous efforts to list the business have been delayed. Meanwhile, potential co-investors may shy away from an entity that appears unable to escape controversy.

Past missteps hardly inspire confidence. 1MDB overpaid for the energy assets it has acquired since 2012 from local tycoon Ananda Krishnan and other conglomerates. It has also attracted scrutiny by paying unusually high fees on bond issues worth $4.8 billion arranged by Goldman Sachs in 2012 and 2013. Around $3 billion was earmarked for a joint venture with state-backed Abu Dhabi investor Aabar. Although the two countries retain a strong relationship, the terms of the venture have still not been finalised and an agreement appears unlikely to materialise.

The fund’s lack of transparency has been a particular concern in recent months. Its failure to repay a 2 billion ringgit loan due at the end of November sparked a broader market sell-off as investors worried that 1MDB’s debts might pose an additional burden for a country already grappling with the plunge in global oil prices.

Kanda said on Feb. 15 that the loan had been settled but provided no explanation of how. Even though Krishnan is widely believed to have played a part in clearing the loan in return for a share of the energy business, 1MDB has remained silent on the issue.

Meanwhile, 1MDB has become a target for Najib’s political opponents. Following reports that a local tycoon had siphoned money out of the fund, former Malaysian Prime Minister Mahathir Mohamad called for an investigation into its finances. In an attempt to contain the political storm, Najib on March 4 ordered Malaysia’s auditor-general to verify 1MDB’s accounts.

The risk is that the political controversy makes it harder for 1MDB to clean up its finances. If the fund is unable to reduce its debt, the government may be forced to help out, for example by asking state-backed pension funds and companies to support a listing of the energy business or become equity partners in its real estate projects.

Alternatively, the government may have to support 1MDB’s debt directly. The state has explicitly guaranteed 5.8 billion of the fund’s borrowings. Extending this to all of 1MDB’s net debt at the end of March 2014 would increase the state’s contingent liabilities to 18.1 percent of GDP from 15.1 percent at the end of the third quarter. That’s on top of federal government debt that was already at 52.8 percent of GDP at the end of the same period.

What 1MDB’s many critics really want is a frank and simple explanation of how a fund supported by the Prime Minister ended up in such a financial mess. That would probably draw attention to past mismanagement and costly mistakes. Unless it is able to complete its ambitious clean-up, however, 1MDB’s woes will continue to be a political and financial burden.

First published March 12, 2015

(Image: REUTERS/Olivia Harris)

BY UNA GALANI

The crisis at 1Malaysia Development Berhad may weigh on sovereign investors. The fund has spawned one of the industry’s worst scandals. Allegations of graft involving Prime Minister Najib Razak – which he strenuously denies – have led to a political crisis, a plunging currency, and investigations from Switzerland to Hong Kong. Emirati backer International Petroleum Investment Co could now be on the hook for $7 billion. Though neither is a typical sovereign wealth fund, more traditional peers could suffer in the fallout.

IPIC, chaired by Abu Dhabi royal and Manchester City owner Sheikh Mansour bin Zayed Al Nahyan, aided 1MDB’s debt-fuelled expansion. Now that 1MDB is in trouble, IPIC has agreed to assume responsibility for debt – including bonds, interest payments, and other bits and pieces – equivalent to about 60 percent of the value of 1MDB’s total assets at the end of March 2014. In return, IPIC will receive unspecified assets – most likely real estate.

The diagnosis is not difficult. State ownership combined with powerful patrons enabled all-too-easy access to capital. Both funds have made questionable investment decisions. Similar problems led to the 2009 Dubai debt crisis, which eventually required a $20 billion bailout from Abu Dhabi.

The core problem is that 1MDB and IPIC are more opaque, and have higher risk appetite, than many other sovereign wealth funds. Yet their travails play to the concerns that many governments and financial institutions already have about dealing with sovereign capital more widely.

Leading sovereign funds could also suffer by association with the smaller local mavericks. 1MDB and IPIC operate in the shadows of larger, more established entities: the Abu Dhabi Investment Authority and Malaysia’s Khazanah Nasional Berhad combined manage over $660 billion, according to the Sovereign Wealth Center.

The controversy is bound to make at least some more cautious in dealing with the sector as a whole. That might mean some deals are never offered to funds, or are subject to heightened political scrutiny. To address that, governments will need to reassure themselves that decision-making processes and transparency at their investment vehicles are up to scratch.

First published Sept. 11, 2015

(Image: REUTERS/Olivia Harris)