Poker face

Sovereign fund 'debt crisis' is stain on Malaysia

Malaysia's government-owned investment company is playing a high-stakes game with the country's financial reputation. 1Malaysia Development's cash pile and a guarantee from a local billionaire suggest that a recent missed loan repayment is more negotiating tactic than a sign of financial distress. Yet, the lack of transparency at the indebted vehicle which counts Prime Minister Najib Razak as an adviser is hurting Malaysia.

1MDB has the resources to repay the 2 billion ringgit loan ($558 million) that was due at the end of December. Though the loss-making real estate-to-energy company had $11.7 billion of total borrowings at the end of March 2014, it also had $1 billion of cash. Since then, 1MDB's newly-installed chief says it has redeemed a further $1.1 billion from investments in portfolio companies in the Cayman Islands.

Besides, even if the sovereign vehicle walked away, lender Malayan Banking would not be out of pocket. The loan is guaranteed by Usaha Tegas Group, the holding company led by billionaire Ananda Krishnan, according to a person familiar with the situation. The guarantee was issued after Krishnan sold 1MDB an energy asset in 2012 for around $2.8 billion, the source added.

1MDB's plan to reduce debt through a listing of its energy portfolio appears central to the standoff. Another holding company linked to Krishnan has an agreement to subscribe to equity in one of 1MDB's energy units up to a value equivalent to the disputed loan, according to the sovereign group's latest financial report. It also has warrants that can be exchanged for shares in the energy assets in the event of an IPO.

A listing of 1MDB's energy unit could value it at $3.75 billion, assuming the government retains a 20 percent stake. Converting the loan into equity would give Krishnan a 15 per cent shareholding. After overpaying for the asset, 1MDB will be reluctant to give too much away. Yet, with another large Malaysian power company also looking to list, 1MDB would welcome the support of a high-profile investor.

The problem is that the standoff, alongside a plunging oil price, has spooked financial markets: the Malaysian ringgit has fallen against the dollar since news of the missed repayment broke. Malaysia's government has more than just narrow commercial reasons to hope that the brinkmanship is resolved quickly.