1MDB Focuses On Three Main Aspects

KUALA LUMPUR: Excerpts of exclusive interview with 1Malaysia Development Bhd (1MDB) president and group executive director Arul Kanda.

Question: Can you share a little bit more on 1MDB’s rationalisation plan? What is the company’s current liabilities and assets after it sold its 60 per cent stake in Bandar Malaysia?

Answer: If we look back at June 2015, the rationalisation plan was presented to the Cabinet, comprising three main aspects.

The first was to carry out a debt-for-asset swap with Abu Dhabi’s International Petroleum Investment Company (IPIC), which would involve RM16 billion.

Secondly, the sale of shares in Edra Global Energy Bhd, which we carried out recently, and thirdly, the sale of shares or equity in the Bandar Malaysia project, for which an agreement we managed to sign on December 31 last year.

The three aspects were important for us to reduce and manage the company’s debts and if we add them up together, it would total up to RM42 billion. So, to me, 1MDB has an asset value that has been recognised by domestic and international investors. This is very important and the financial woes faced by the company has been overcome through the measures that we have implemented.

Q: Does that mean there are no more issues on the company’s financial woes? But yet there are still ‘noises’ heard over the measures taken by the company.

A: For me, these noises or rather criticisms, are from the Opposition. The cash flow mismatch faced by 1MDB has been overcome. Once the mismatch is addressed, it means the company has the ability to meet the requirements needed to pay the interest and principal debts upon maturity. So, from that aspect there should not be any more criticisms.

Q: What about 1MDB’s debt level? How would you describe it?

A: The debt level is RM42 billion, as stated in the last audit statement as of March 2014. However, more than half of those debts is in US dollar. So, with the current position of the ringgit compared to the US dollar, the debt value would have increased (as per the value of ringgit against the US dollar).

But at the same time, one should be reminded that these debts are due in 2022 and 2023. In a few years, the position of ringgit would strengthen and this would no longer be an issue. So, for us to take into account the value of the debt in ringgit at any one time would not pose an issue for the company. What is most important is that when the debt matures, in this case in 2022 and 2023, is that we would have a solution then and these solutions are made up of the three aspects that we have discussed earlier.

Q: Some have said that 1MDB is an idealistic plan?

A: First of all, when we talk about capital structure of a company, what is most important is to understand that on the outset, an approach was taken to use debt. In fact, we use debt in our everyday lives. For example, when we buy a house, 80 to 90 per cent of the purchase price is a loan from the bank.

The same goes with purchasing a car. So, the use of debt itself is not an issue, neither is it wrong. But what is more important is that we are able to generate income from the business to pay the interest and also principal that is payable upon its maturity date or when it is necessary.

From this point of view, if we take a look at 1MDB, 80 per cent of the company’s debts are long-term, where the interest or principal payments are only payable when the assets have matured.

However, the problem arose when Edra Global Energy Bhd’s initial public offering (IPO) failed to commence in November 2014 as this was one of the measures for the company to generate cash (income). At the same time, when the IPO failed, the company also suffered a loss of RM665 million and had a principal debt amounting to RM2 billion that had to be paid.

The three issues cropped up at the same time and this caused a drop in the confidence level of the company. Once the confidence was gone, the company was unable to implement what it planned to do, which was to roll over debts by taking new loans, to repay maturing debts or to sell assets to generate cash. So, that is the real issue concerning 1MDB and having lost its confidence level, it had led to an imbalance of cash in the company.

Q: If the IPO was successful, would it have been able to cover the RM42 billion in liability?

A: Not only in that aspect but the IPO would also have been able to generate cash for the company that could be used to repay the RM2 billion debt. The income generated from that would also be able to reduce the debt level while paying off interest rates, and the like. So, the company would not have faced a cash-flow mismatch if the income generated from the IPO had been used.

Q: What are the businesses under 1MDB that can generate income or the investments made that can help generate income?

A: There are two key aspects. The first one is generating electric power, where Edra Global Energy has the cash flow from electricity sales and the annual revenue is RM5 billion. The second aspect would be the several pieces of land in strategic areas owned by 1MDB.

For example, for Tun Razak Exchange, our proposal was to split the land through a master plan and then sell them in smaller plots to domestic or international investors. So, in the near future, both will need to generate enough income to meet with the interest and the principal of maturing debts.

Q: In hindsight, was the 1MDB business model the right model? Was there something wrong with it?

A: First of all, we can all agree that hindsight is 20:20, right? Looking back with what we know today, it is easy to criticise or to have a different view of how things could have been done. To me, the use of debt in itself is not wrong as I have shared (earlier), we all use debt in our day-to-day lives.

That use of debt created the certain discipline that the company had to run its business to pay back the debt but, at the same time, that use of debt by the company freed up government resources to be used for other purposes like building schools, roads and other development projects.

So to me, that in itself was not an issue, where it became an issue over time as the debt increased over time, which was a function of the assets was also increasing. To give you an example: if you buy one house with a mortgage, and then you buy a second house, third house, fourth house, and a fifth house, your debt goes up, your mortgage debt goes up along with your assets. But what is important is that you are able to rent those houses and get the rental as an income to pay the mortgage.

Therefore, in 1MDB’s case, it got to a point where rental income was not sufficient any more and, therefore, we have to now start selling those houses in order to pay back the mortgage that we took.

Q: Is this what you call a cash-flow mismatch?

A: Absolutely. Had the efforts to monetise the assets worked out according to the plan, 1MDB would not have had this problem. But because of that issue, I think the board and the shareholders took concrete action which included hiring myself, for example, and then the announcement of the strategic review while the rationalisation plan was designed to fix the problem which came up.

Q: You mentioned earlier about the IPO, which was eventually called off because of the market’s confidence level. Was it because the level was very low then?

A: Yes. That is right.

Q: So, if you were to go ahead (with the IPO), would it have been costly and a failure?

A: That is right. In fact one thing that disappoints me as a Malaysian is that when the problem started with this company, which is 100 per cent owned by the government and, therefore, ultimately the rakyat benefits or loses from it… when the problem started, the Opposition and those who are not aligned with the government immediately criticised it and made things worse. At the same time, the investigations started.

So, to me, it is better to let the company stabilise, get the confidence back and then commence with the investigations to find out what really went wrong… But instead what did we have? We had criticisms, we had speculations, we had baseless allegations launched against the company which, frankly, drastically reduced the options available to it and that is why in the end, the only viable option we had was to start selling assets to pare down the debt.

Q: What are the other elements that are still pending in the rationalisation plan?

A: We are done from a legal perspective, meaning we have signed with IPIC, we have signed with Bandar Malaysia and we have signed for Edra. So these are the legally binding agreements and we did it within the six months period specified by the prime minister (Datuk Seri Najib Razak). So that part is now done. Now, when you sign an agreement, say for example, to buy a house, there are a number of things that have to take place post-purchase.

In our case, there are consents that we need to procure from lenders, we have legal and regulatory approvals that we need to get and in some cases, we still need to work out the mechanics of how to transfer shares or land and assets. So, to do that we have a period of time to complete the transaction. For Edra, we estimate that will happen by next month, for Bandar Malaysia and IPIC by June.

But the important point is legally, we are bound or the parties are bound and right now it is the question of execution and process.

Q: How about the Tun Razak Exchange and land in Penang and Port Klang?

A: Let me take a step back. If you look at the Edra deal, it is the largest-ever power and utilities deal in the history of Malaysia. It is the second-largest ever foreign direct investment (FDI) into Malaysia, into one company. If you look at Bandar Malaysia, the deal that we have done is the largest-ever real estate deal in the history of Malaysia.

We were very focused on doing these two deals in a very short span of time. Now that we are done with that, we are going to focus on the Penang land; the Air Itam land, where most likely we will seek development partner so we will be able to sign a joint venture with a developer and for them to develop the land.

In the case of TRX, our development team is there, you would have seen the land sales that we announced this year and I challenge you to find any other property company in Malaysia that has sold that much land by value in one year, which we have done in TRX at prices that have set a new benchmark for Kuala Lumpur on a per square foot basis.

So to me that team is a strong team, it is a good team, I do not see any need for us to sell equity in TRX and I hope that business can continue whether owned by us or whether owned directly by Ministry of Finance Inc, in terms of its future development.

Q: Why did you opt for 60 per cent, not 100 per cent for Bandar Malaysia?

A: The land in Bandar Malaysia is very strategic and it is a national development project. Therefore it is important that the government continues to have a role both from the aspect of, for example, affordable housing as well as creating the integrated transport hub with high speed rail, KTM Komuter, mass rapid transit, Ekspres Rail Link, and Bus Rapid Transit.

From that perspective, I believe it is important the government remains involved, so that the vision and the objective behind the Bandar Malaysia project can carry on.

That is one very important reason.

The second reason is that there is significant future value in that project. So, if you recall we have sold land value today at RM12.35 billion. Now, can you imagine when the development starts that value can only go upwards.

So from my perspective, I would very much want the Malaysian government to continue owning a stake (in the project) for the benefit of the rakyat. Additional reporting by Amir Hisyam Rasid and Koi Kye Lee



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