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1MDB loans to PetroSaudi put nearly RM6bil at risk

March 28, 2013

 

DAP MP Tony Pua says 1Malaysia Development Bhd is a giant ponzi scheme whereas 1MDB describes itself as a strategic development company.

“As a strategic enabler for new ideas and new sources of growth, 1MDB leads in market-driven initiatives to help transform Malaysia into a thriving economy,” its website says.

Pretty lofty words but the problem is that 1MDB has not been very articulate about how it wants to achieve its aims. Since setting up in 2009, it has not publicly reported its results.

Its accounts since setting up in late Februrary 2009 to the year ended Mar 31, 2011, show a different picture to what the website paints and indicates that the profits made to date are largely paper gains which have no impact on cash flow, raising serious questions over utilisation of large funds raised.

A ponzi scheme?

If not for some paper transactions and revaluations, 1MDB would not have reported any profits, which no doubt led to Pua’s assertion that it was a Ponzi scheme.

In May 2009, 1MDB issued bonds of RM5 billion via an Islamic facility at such favourable rates to those who took them up that it raised many questions among those in the finance industry at the time. (KiniBiz deals with the various bond issues in an article tomorrow.)

1mdb-petrosaudi-deals-CHART-3.0Because these bonds were issued at a discount to the par or nominal value, 1MDB actually raised RM4.40 billion and not RM5 billion. The first investment that it made was in Sept 2009 when it put in US$1 billion for a 40 percent stake in a US$2.5 billion joint-venture with PetroSaudi International Ltd.

This venture, according to the joint press release, will “seek, explore, and participate in business and economic opportunities which result in the enhancement and promotion of the future prosperity and long-term sustainable economic development of Malaysia. It is expected to actively make investments in the renewable energy sector.”

The JV was supposed to bring investments into Malaysia from the cash-rich Middle East but the initial investments did not at all pan out in that way with funds moving in the opposite direction.

While 1MDB put in US$1 billion (about RM3.49 billion then) into the JV, PetroSaudi injected an asset for US$1.5 billion, Pua points out, which was an oil reserve in the Caspian Sea. That was not renewable energy and that certainly did not mean investments into Malaysia.

If anything, it looked like 1MDB was bankrolling PetroSaudi’s attempts to develop the Caspian sea oil reserve. But according to its accounts, on 31 Mar 2010 (incidentally, the last day of its accounts for the financial year), 1MDB sold the 40 percent stake in the JV, 1MDB PetroSaudi Limited which was incorporated in the British Virgin Islands, back to PetroSaudi.

The sale was made for US$1.2 billion (RM4.14 billion), giving 1MDB a handsome gain of US$200 million (or about RM650 million at exchange rates then). But there was a catch – PetroSaudi ssued debt of a like amount for the sale – IMDB received no cash.

That’s not all, while the notes carry a so-called profit rate ( equivalent to interest rate) of a good 8.67 percent, it will be repaid in one lump sum only 11 years later on Mar 31, 2021. The loan was guaranteed by PetroSaudi itself.

Questions, questions

petrosaudi-internationalThe questions that arise: Why did it exit the JV? How did it make a gain of RM650 million on the investment in just six months? Why did 1MDB not insist on cash payment and instead accept  an 11-year bullet repayment bond? Why does PetroSaudi, supposedly owned by those with deep pockets, need the loan?

Effectively, almost all of the RM4.4 billion barring some RM260 million that 1MDB raised through bonds was used to finance PetroSaudi! That’s hardly a strategic investment even though the two percentage point difference between what 1MDB receives from the loan and what it has to pay its own bondholders brings in recurrent income.

While auditors KPMG did not qualify the accounts for the period from incorporation of 1MDB (Feb 27 2009) to Mar 31, 2010, they emphasised that the fair value of the loan to PetroSaudi depended on “certain assumptions” which are “critical”. The accounts did not show the assumptions but said that the fair value of the debt ranged from RM3.86 billion to RM5.04 billion.

petrosaudi-documentsFor the period to Mar 31, 2010, 1MDB reported a pre-tax profit of RM425 million but if not for the “gain” of RM650 million on the disposal of the 40 percent stake in the joint venture with PetroSaudi it would have made a loss of RM225 million.

For the year to Mar 2011, 1MDB said it made a profit of RM544 million but even that is because of a revaluation of a piece of land that it acquired from the government at RM194 million and subsequently revalued to RM1.02 billion for a gain of RM827 million. If not for that 1MDB would have reported a loss of RM283 million.

Increased loans to 1MDB

But even more worrisome is that 1MDB increased its loans to PetroSaudi by a further RM1.57 billion through a US$500 million facility carrying an interest rate of 8.25 percent a year. This will be repaid in a bullet payment in Mar 2015. Incredibly, 1MDB’s exposure to PetroSaudi has increased to RM5.71 billion from RM4.14 billion.

oilrig-ringgit-malaysiaAs at Mar 2011, 1MDB had loans of  RM6.69 billion. That means that over 85% of the money that it had borrowed were simply on lent to PetroSaudi, not for the short term, but for long period of 11 years for RM4.14 billion and five years for RM1.57 billion. Of every ringgit that 1MDB borrowed, 85 sen went to PetroSaudi!

And since 1MDB raised no further bonds during this period, the increased lending to PetroSaudi came from term loans and other borrowings which effectively meant that 1MDB was lending long term with short-term money.

It becomes obvious why Pua calls it a ponzi scheme – PetroSaudi is paying interest to 1MDB for the loan it took from 1MDB to buy 1MDB’s 40 per cent stake in the JV, 1MDB PetroSaudi. That’s bad enough.  And 1MDB, further down the road is lending more money to PetroSaudi which can use the money to pay interest to 1MDB, which means compounding the problem.

Why is 1MDB raising funds for PetroSaudi? And can we be sure that PetroSaudi will pay back the sums in bullets, one maturing in five years and one in 11 years? Recall that 1MDB has no recourse to anything else but a guarantee from PetroSaudi for this. Everything so far has revolved around PetroSaudi.

corruption-ringgit-malaysiaIf PetroSaudi, for any reason cannot pay back the debts, 1MDB, is dead. It is simply inconceivable that a national strategic development fund can risk public money like this – and to the tune of nearly RM6 billion with interest yearly accumulating at the rate of nearly RM500 million a year.

That additional RM1.57 billion in loans to PetroSaudi is enough for just about three years of interest payment, if the principal sum is to be used only for interest payments.

Perhaps one saving grace could be that  there is at least a spread that 1MDB is getting from using the proceeds of its borrowings and on-lending to PetroSaudi to give a profit from holding financial securities.

Alas, even that has not worked out right. Its income from holding financial instruments amounted to RM343 million for the year to Mar 2011 but costs were RM333 million, giving a net gain of a meagre RM10 million. But this was wiped out many times over by derivative losses of over RM250 million to give a net loss for holding financial instruments of RM242 million.

Paper profits

For roughly the first two years of its operations, 1MDB has made profits only because of a gain on a transaction and a revaluation. Otherwise it would have been in the red.

And it has had no achievements to speak off in this period. It has merely put funds it raised through a favourably priced RM5 billion bond issue and more into PetroSaudi. Why? Is PetroSaudi part of a scheme to suck money out of 1MDB and leave it high and dry?

ringgit-malaysia-genericOne thing for certain, there is too little information on PetroSaudi and to put so much of our money with them is asking for trouble. 1MDB needs to do some explaining and so far it has not.

Pua, who is a member of the Parliamentary Public Accounts Committee, said the committee questioned 1MDB officials about Petrosaudi but little was forthcoming. “We questioned them about Petrosaudi and asked for documents but all they gave us was press releases,” he said in an interview.

For the year ended Mar 31, 2012, abbreviated accounts indicate that 1MDB made a profit of RM44.7 million but as we saw that can be quite meaningless. Detailed accounts for the year ended Mar 2012 are not available but are likely to prove interesting.

Meantime, its borrowings rose to RM7.82 billion as at end-Mar 2012, an increase of about RM1.13 billion a year ago.

To sum up, 1MDB had nothing to show for its first three years of existence and earned the dishonour of simply funnelling more than four out of every five ringgit it borrowed to PetroSaudi.

And by no stretch of even the most expansive imagination can one conclude that this is the work of a strategic development company that leads in market-driven initiatives to help transform Malaysia into a thriving economy.

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2 Comments leave one →
  1. March 31, 2013 7:48 am

    It’s important MP’s like you and Pakatan work assidulously in revealing who were the bonds issued by and the quantum and % of commissions paid to, who were the bonds issued to and precisely on what terms. If it transpires these were over and above the norms of international financial issues, and against public interest since it’s a sovereign fund, Pakatan should file a police report for MACC to investigate, and put the culptits behind bars as well as make them pay back every cent they robbed us of!

    Najib already lied (one more among so many other lies) to us that 1MDB earned a 25% return from PetroSaudi within 6 months, when in fact, if you remove the capital element and factor in the 11-year instalment repayment, the real return will be less than 8% per year!!

    Btw, as for who reads the MSM and Blogs, check out :

    http://donplaypuks.blogspot.com/2013/03/yes-prime-minister-youd-be-shocked.html

    Dpp
    we are all of 1 Race, the Human Race

  2. Robert Wong permalink
    April 1, 2013 11:30 am

    This is grand theft!

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