Power clean

Malaysia's weak currency may power 1MDB cleanup

Malaysia's weak currency may help the country clean up its scandal-hit fund. Despite political controversy, 1Malaysia Development Berhad is trying to sell its power assets. The declining ringgit could give foreign bidders an advantage.

1MDB is at the centre of allegations of graft involving Prime Minister Najib Razak that have triggered a political crisis and sparked investigations from Hong Kong to the United States. The energy-to-real estate fund is financially stretched as a result of an acquisition spree that saw it rack up net debt of 38 billion ringgit ($8.7 billion) by the end of March 2014, the last period for which it has published accounts.

Between 2012 and 2013, 1MDB paid 12 billion ringgit, excluding debt, for energy assets in Malaysia and four other countries. The equity value of the assets may have fallen to 7.8 billion ringgit as of March 2015, CLSA estimates. Though the level of associated debt is unclear, a sale would go some way to resolving 1MDB's financial mess.

Given the political storm, bidders might be expected to stay away. Nevertheless, the auction of the power assets has attracted four bidders. State-backed utility Tenaga Nasional is the only prospective Malaysian buyer on the shortlist, which also includes Hong Kong-listed CGN Meiya Power and ACWA Power, a privately-held Saudi player.

Tenaga looks like the best fit as current rules mean foreign investors can only own up to 49 per cent of Malaysian power assets. However, even though Tenaga can leverage up to do a deal, it would be hard for the $16 billion company to justify matching 1MDB's inflated acquisition price. Its shares have already fallen on fears that it might.

That's where foreign bidders may have an advantage. The 18 per cent slump in the ringgit against the dollar over the past six months means an outlay of, say, 12 billion ringgit is equivalent to $2.8 billion today - $500 million less than in March.

Selling to a non-Malaysian bidder would be a less-complete sale and risk adding to the domestic political outcry. But getting a higher price in local currency terms might at least help spare 1MDB's financial blushes.