This morning there was a pandemonium on how 1MDB managed to repay its USD975 million (RM3.6 billion) loan to its bankers. Lucky bankers.
And of course, the loudest noise will come from politicians who are overjoyed to see that 1MDB could repay its loans. These people will ignore the obvious fact that 1MDB actually managed to repay those bankers just because it received a ‘not a loan, not a bail out’ payment from International Petroleum Investment Company (IPIC) last week.
For the uninitiated, here is the simplified description on what this USD975 million loan payment is all about.
Sometime in September 2014, 1MDB acquired a USD975 million loan from a consortium of banks which was then guaranteed by Malaysian government and secured using the USD1.103 billion worth of units it has in the BSI Bank in Singapore.
This USD975 million loan was then used to pay Aabar Investments (subsidiary of IPIC) for an early termination of a 10-year old financial options.
It is unclear from where this USD1.103 billion worth of units came from. These units are said to be held custody by a special purpose vehicle called Brazen Sky, registered in the Cayman Islands.
Now, back in February 2015 the CEO of 1MDB mentioned that this USD1.103 billion in BSI Bank is in the form of cash. This is an expected response, generally to appease its lenders.
The Prime Minister confirmed it was indeed cash during his parliamentary reply on March 10th 2015.
But in late April, news report from Singapore’s Business Times stated that there is some discrepancy in 1MDB’s bank account in BSI Bank.
This raised an alarm among the consortium of banks in early May and they planned to ask 1MDB to settle their loan ahead of the repayment deadline in September 2015. The banks have the right to do this if they suspect its client has no capability to repay the loan.
Unfortunately their suspicion and the discrepancy is confirmed to be true when on the 19th May 2015 the Prime Minister announced that the money parked in Singapore is not in cash, but in paper assets; of which a few days later the Ministry of Finance eventually amended it to be in units.
There was no cash after all. The banks will not accept worthless documents called ‘units’ as collateral for their loan.
Panic strikes and on 29th May 2015, the Ministry of Finance announced a ‘rationalisation exercise’ where IPIC/Aabar will give payment of USD1 billion (RM3.6 billion) to 1MDB to help it repay the banks by 4th June 2015.
Basically, money from the banks given to Aabar in September 2014, is returned to the bank in June 2015. This business model is often called – ‘the unnecessary stupidity’.
On top of it all, the ‘units’ are supposed to be ‘profits’ from an investment made by 1MDB which was terminated in 2012. But the profits was redeemed not in the form of cash, but substituted with assets/units mutually agreed to be worth USD1.103 billion.
If indeed there is real value in those units, 1MDB should just cash them out in August to meet its deadline in September, or if 1MDB is really strapped for cash, all it has to do is just wait till after the September deadline and the consortium of banks will just take ownership of those units.
But this is not to be.
What is more absurd, to sweeten the deal of getting their own money back from IPIC/Aabar, the Finance Ministry also announced that the RM3.6 billion payment will be part of a larger strategy to lessen a RM16 billion 1MDB debt; in other words, IPIC/Aabar will get financial assets of 1MDB.
It is uncertain what these assets are although the only known valuable assets 1MDB has are the lands in TRX and Bandar Malaysia which were originally reserved for bumiputra development.
So in the end, the bankers get their money back, with some interests; Aabar gets USD975 million cash last September and from now on, some of 1MDB’s assets, including those redundant units. And 1MDB gets to lose some of our prized assets.
Since 1MDB is getting compliments for this whole financial absurdity, maybe we should congratulate all involved with a pat on the back.
Well done, 1MDB.
Your zero governance strategy will be made an example among financial journals and research papers in years to come.
So there you go, the simplified summary of what had happened. Should there be any other versions, please do not hesitate to state your own simplified description on what really happened.