KUALA LUMPUR, May 30 – 1MDB’s prompt payment of its RM143.75 million debt obligation on Monday is a timely reminder that not everything surrounding the company is mired in controversy. The payment, due today, was the scheduled coupon on 1MDB’s RM5 billion 5.75 per cent Islamic Medium-Term Notes (“IMTNs) due 2039, and it was paid on time and in full.
While this is obviously good news for investors, it is further proof that the company’s management, led by Arul Kanda Kandasamy, 1MDB President and Group Executive Director, is delivering on its promises and obligations to bondholders. The reason why this matters is that 1MDB is currently in dispute with Abu Dhabi-based International Petroleum Investment Company (IPIC) over interest payments due on US$3.5 billion of bonds.
Because of the dispute, a default was called on the bond payments by IPIC which stepped in to make the interest payments to bondholders on the so-called Langat and 1MDB Energy notes. As a result of this payment dispute, questions were asked about the impact on bondholders and the long-term ability of 1MDB to meet is debt obligations.
Arul was clear in his answer; the dispute with IPIC is limited to the Langat and 1MDB Energy notes, and notwithstanding this dispute, 1MDB will meet and service all its current debt obligations. He said these promises were backed by his track record of delivering on the rationalisation plan that 1MDB is implementing, and by the ample liquidity that the company has at its disposal.
Arul, who was brought in to oversee the rationalisation plan, has delivered on two of its three main aims; the sale of Edra Energy and the sale of a portion of equity in Bandar Malaysia. In terms of financing, 1MDB has approximately RM2.3 billion in unrestricted cash across the group. That is a strong position to be in.
At the same time, 1MDB decided to reach out to bondholders to explain the current situation and answer their questions. On a recent bondholder call, Arul said that conversations with bondholders and trustees of ringgit and US dollar denominated debts had been calm and positive.
He used the call to explain that once the rationalisation plan has been implemented, 1MDB will become a conduit for debt payments, paying back debt through the future cash flows of four assets that are being handed over to the Ministry of Finance. These assets are Bandar Malaysia Sdn Bhd, TRX City Sdn Bhd, Air Itam land and Pulau Indah land.
He also reiterated that 1MDB has been in contact with IPIC and is in communication with its executives in an effort to find a solution to the dispute. The problem facing investors is that there is no fixed timeline or end date for this communication and contact process, nor any clarity over whether legal action will be taken.
As such, they have had to assess a long-term view based on the underlying guarantees of their holdings and their optimism about getting paid. So far, they seem comfortable with how discussions have been going, judging from the price of 1MDB’s bonds which have partially recovered after a sudden decline on the news of the default.
The main 1MDB Energy note was trading at 103.64 at the close on May 26, little changed from a week earlier. It is not every day that you can say the financial markets offer a place of calm from the storm outside, but in this case it proves to be true. As the accusations and slurs fly almost everywhere else, one observer went so far as to describe bondholders as being “quite sanguine” about the situation when the default happened.
Even if this is an exaggeration it proves a point; in the most complex of situations, markets are happiest when they are provided with clear communication, a steady flow of information and a management team that delivers on their promises. However, the longer the dispute with IPIC continues with no end in sight, positive market sentiment may turn sour. This makes it even more important that 1MDB remains transparent with investors and continues to judiciously execute its financial responsibilities.