Najib says 1MDB’s US$3b bond has government support

KUALA LUMPUR/HONG KONG: A US$3 billion (RM11 billion) bond issued by state-owned 1Malaysia Development Bhd (1MDB) has the support of the government, Prime Minister Datuk Seri Najib Abdul Razak said – a statement that confirms remarks by another minister but also highlights the level of concern surrounding the strategic development company's massive debt.
The troubled power plant and property fund has debt of more than US$11 billion, a burden weighing on the country's sovereign rating and one which has also been a factor contributing to ringgit weakness in recent months. The prime minister this month ordered an audit of 1MDB's accounts by the Auditor General.
Najib, who also chairs 1MDB's advisory board, said a letter of support the government had written for the 10-year US dollar bond issued in 2013 by 1MDB Global Investments Ltd, a fully owned unit of the fund, stood.
But he added it would only become effective if there was a lack of funds for payment and after considering 1MDB Global's internal funds and assets. The bond yields over 7% compared with 3.9% for equivalent Malaysian government bonds.
While the prime minister's statement provides some reassurance, investors remain concerned about the health of the rest of 1MDB's balance sheet.
Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, which has a negative outlook on Malaysia's rating, said he has been bombarded by clients' questions about 1MDB, which has overall debt equivalent to about 4% of Malaysia's GDP.
Colquhoun, speaking a conference organised by the rating agency in Hong Kong, said Fitch was taking 1MDB into account in its sovereign rating assessment but added it would not be a key driver of the agency's decision.
"We are actually more focused on external liquidity issues."
Najib reiterated the government's support for the bond in response to a question from opposition politician Tony Pua. His statement follows a similar acknowledgement by a deputy finance minister last year.
A letter of support differs from an explicit guarantee because it is not legally enforceable, but global rating agencies such as Standard & Poor's treat it at par with a guarantee as it meets their criteria.
Malaysian authorities have previously said the country has provided an explicit guarantee to only RM5.8 billion of the fund's loans.
1MDB has just completed a strategic review of its operations and said it plans to sell assets and development rights in a move to cut debt. It is also planning an IPO for its energy unit. – Reuters