I last wrote about Malaysia and 1MDB’s travails in November 2015, in my very first blog post for iBC. The Malaysian Ringgit has rallied from the Q4 2015 extremes, but overall times are, if anything, more uncertain for Malaysia. For a primer, a good recap:
Given that 1MDB has now officially defaulted on a $50mm interest payment this week (Monday was the official deadline) on a 5.75% coupon US$1.75bln bond issue , I thought it might be a good time for an update. In bond investing, sometimes a law degree can prove to have more utility than a CFA charter.
In this instance, bond investors are caught in a serious Malaysian stand off between 1MDB and Abu Dhabi’s sovereign wealth fund’s IPIC (International Petroleum Investment Corporation) who provided guarantees on $3.5bln of 1MDB debt (2 x $1.75bln par amount). Sometimes, willingness to pay can be more important than ability to pay. In this instance, 1MDB felt that co-guarantor IPIC should have made the full interest payment. IPIC, for their part, declined to make the payment, noting that cross-default clauses would apply to 1MDB as a result of their inaction. IPIC have stated they will make the referenced interest payments, if 1MDB defaults, which they now clearly have. Both parties are referencing a May 2015 “Term Sheet” whereby IPIC agreed to service the jointly guaranteed debt in exchange for a payment of $1bln from 1MDB, a payment IPIC states was never duly received.
The next $52mm+ interest payment on an identically sized but higher coupon 5.99% 1MDB Energy Ltd security is due is May 11, 2016. Note the ratings of the TIAMK 5.99% 05/11/22 are Aa2/AA, by virtue of the joint and several guarantee on the bond by AA rated IPIC and A- rated 1MDB. 1MDB have stated they are keeping their options open with respect to the May 11, 2016 interest payment. Clearly both sides have retained legal counsel. There is no morning after pill for default.
With the grace period having passed for the payment on the interest payment due Monday April 25, 2016 the clock now begins on calls for payment under the guarantee(s) which has a 10-day wick in terms of cure period. Presumably IPIC, based on previous statements, will pony up the cash required to make the overdue interest payment during this 10 day window.
JP Morgan, in the midst of all this frolic , have upgraded 1MDB Energy Ltd. bonds to “overweight” noting the IPIC guaranteed 1MDB bonds are now trading at +152bp (1.52%) wide, deemed an “excessive spread” 6.08% yield (+472 spread to UST 5yr) to IPIC’s other US$ debt with comparable maturity maturity, yielding 4.56% (+320 UST 5yr).
Not terrain for the retail investor, as sourcing bonds in block size has proven difficult, and the bid/offer spread in even family office clips would elicit alligator tears from Chuck Noris. Institutional investors only, who can cajole their tier 1 coverage into providing a sliver of liquidity in this peculiar market dare play. Unless we see a significant move in price (lower), new players will likely stay well clear of the festivities.
Goldman were the lead on US$6.5bln 1MDB bond issues, a relationship that has caused a great deal of scrutiny in and of itself (fees eclipsed $500mm). Goldman’s rainmaker, former SE Asia Chairman Tim Leissner, took personal leave earlier in 2016 (at Goldman’s request) and was soon thereafter subpoenaed by US investigators.
Malaysia’s own investigation recently cleared Prime Minister Najib Razak of wrongdoing. Numerous other global investigations are on-going (US, UK, HK, UAE, Thailand, Australia, Luxembourg and Seychelles).
A good barometer of EM sentiment, if nothing else. The sky is not falling, but lack of a speedy resolution could see the Malaysian sovereign rating downgraded as the full extent of their 1MDB contingent liability is laid bare.
Malaysia, you’re so crazy. JCG
If you enjoy the content at iBankCoin, please follow us on Twitter