SINGAPORE (May 21): On May 15, Malaysia’s national audit department announced that a formerly classified report on 1Malaysia Development Bhd had been reclassified as an open document. The audit department commenced its audit of 1MDB on March 10, 2015 using available financial statements from FY2010 ended March 31 to FY2014. The audit department says it was unable to obtain management accounts for FY2015, as well as bank statements from foreign financial institutions.
A summary of the report was published on the audit department’s website. Several other reports, one containing as many as 386 pages, have been circulating. However, the audit department clarified on May 16 that only the summary has been uploaded online.
Below are some of the major findings from the summary, translated from the original document in Bahasa Melayu. Some details differ from the US Department of Justice’s civil complaint; however, the major events tally.
Early events
• 1MDB started out as the Terengganu Investment Authority on Feb 27, 2009. On May 15, it signed an agreement to issue RM5 billion worth of Islamic bonds for its initial capital. Terengganu Inc, the state investment arm and then-owner of TIA, disagreed with the bond issue and asked the CEO to cancel it. When he did not do so, the CEO was removed from the board. However, a new director was appointed and he went ahead with the issue anyway.
• Ownership of TIA was transferred to the Ministry of Finance (MOF) on July 31. It was renamed 1MDB on Sept 25.
Investments with PetroSaudi
• On Sept 28, 2009, 1MDB signed a joint-venture agreement to invest US$1 billion for a 40% stake in 1MDB PetroSaudi. PetroSaudi Holdings (Cayman) would hold the remaining 60% and contribute at least US$1.5 billion in assets. This investment decision was made in eight days, with no detailed valuation process and before issues and conditions mentioned by 1MDB’s board had been addressed. A valuation of the assets from PetroSaudi Holdings (Cayman) was commissioned on Sept 29 and delivered by Edward L Morse the same day.
• On Sept 25, PetroSaudi Holdings (Cayman) had purportedly extended a US$700 million loan to 1MDB PetroSaudi. Repayment in full was due on Sept 30. Of 1MDB’s US$1 billion investment, only US$300 million was transferred to 1MDB PetroSaudi. The remaining US$700 million was used to repay the loan, without board approval.
• Six months later, 1MDB exchanged its 40% stake in 1MDB PetroSaudi for US$1.2 billion in Murabaha notes guaranteed by PetroSaudi International. On Sept 14, 2010, 1MDB subscribed for an additional US$500 million in Murabaha notes.
• On June 1, 2012, 1MDB exchanged its notes and the accumulated profits — amounting to US$2.22 billion — for a 49% stake in PetroSaudi Oil Services, a subsidiary of PetroSaudi International. This asset swap arrangement was signed without proper due diligence and before the receipt of board approval. PetroSaudi Oil Services was operating in Venezuelan waters and negatively affected by US sanctions.
• Forty-five days later, 1MDB’s CEO recommended the 49% stake be sold due to the sanctions. It was sold to Bridge Partners International Investment for US$2.22 billion on Sept 12. In exchange, Bridge Partners issued non-interest bearing notes valued at US$2.318 billion to be repaid in one month. The same day, 1MDB’s subsidiary Brazen Sky signed an investment management agreement with Bridge Global Absolute Return Fund SPC and Bridge Partners Investment Management (Cayman) to invest this money. Bridge Global had no asset management licence nor experience managing large sums of money.
• On Dec 20, 2014, 1MDB’s board was informed that US$1.392 billion of the funds with Bridge Global had been redeemed and the remaining US$939.87 million would be redeemed at the end of the month. In fact, the entire portfolio had been pledged to Deutsche Bank for a US$975 million loan.
• The US$1.392 billion in funds redeemed were transferred to 1MDB Global Investments, instead of being repatriated to Malaysia as had been demanded by the board. The remaining US$939.87 million was later transferred to International Petroleum Investment Co. In exchange, IPIC paid 1MDB US$1 billion and assumed financial obligations for notes worth US$1.75 billion.
Resource investments
• On Jan 7, 2011, 1MDB established SRC International to invest in the energy and resources sectors. SRC received a RM15 million development grant from the government and financing of RM2 billion from the pension fund Kumpulan Wang Persaraan.
• A US$45.5 million investment in a coal mine in Mongolia was approved without a feasibility study.
• On Feb 15, 2012, ownership of SRC was transferred from 1MDB to MOF via a dividend-in-specie. This transfer of ownership reduced 1MDB’s losses from RM25 million to RM16.2 million and reduced its gearing ratio from 12 times to 9.5 times.
Land purchases
• From 2010 to 2015, 1MDB bought five plots of land for a total of RM2.111 billion.
• It paid RM302.38 million for land to build the Tun Razak Exchange (TRX), [a planned] international financial centre. In September 2015, 1MDB sold five plots within TRX for RM1.358 billion and 11 plots for RM2.592 billion. The sale was expected to finance developments at TRX by 1MDB Real Estate, a 1MDB subsidiary since renamed TRX City. However, RM1.095 billion of the funds was advanced to 1MDB. In 2016 and 2017, the TRX project was expected to face negative cash flow. A special purpose vehicle created to finance TRX secured a revolving credit line of RM229.5 million in August 2015, yet this credit facility was not used for TRX developments.
• It paid RM368.72 million for land to build Bandar Malaysia. Part of the Bandar Malaysia project requires the relocation of the Sungai Besi airbase, costing RM2.717 billion.
The government contributed RM1.117 billion for this relocation, but 1MDB used RM288 million to repay interest instead. Perbadanan Perwira Harta Malaysia was selected to design and build eight air bases for the relocation project, with completion expected at end-2016. As at August 2015, five of the eight bases were behind schedule, owing to delays in approvals, certifications, transfers of land and weatherrelated disruptions. Payment of RM396.42 million to PPHM was delayed. RM1.926 billion of a RM3.75 billion loan obtained for the relocation was advanced to 1MDB.
• In Air Itam, Penang, 1MDB bought land for low-cost housing projects by acquiring two companies: Gerak Indera and Farlim Properties. The Farlim purchase was far higher than the market price.
• In June 2015, 1MDB completed the acquisition of Tadmax Power, owner of a 318.41-acre plot of land in Pulau Indah, Selangor, for RM344.24 million. The land was intended for a power plant, but was found unsuitable. The plant was instead built in Port Dickson, Negeri Sembilan. In July 2015, the 1MDB board appointed Savills (Malaysia) as the exclusive agent to sell the land.
Investments in power producers
• From 2012 to 2014, 1MDB invested RM12.07 billion to buy three independent power producers (IPPs): Tanjong Energy Holdings (RM8.5 billion), Mastika Lagenda (RM2.342 billion) and Jimah Energy Ventures (RM1.225 billion).
• The Mastika Lagenda acquisition was made without a detailed discussion or explanation at a meeting. The proposition paper was incomplete. The due diligence report was not presented at the board meeting.
• The enterprise values for the three IPPs were calculated by Goldman Sachs using different methodologies and standards. Enterprise values assigned to Tanjong Energy and Mastika Lagenda were higher than that for Jimah Energy.
• Tanjong Power Holdings, the parent company of Tanjong Energy, recorded a gain of RM7.96 billion on the sale to 1MDB. Genting, the parent company of Mastika Lagenda, recorded a gain of RM1.89 billion.
• From 2012 to 2014, loans of RM18.79 billion were taken to buy the IPPs. As at June 2015, the value of the loans connected to the IPPs had risen to RM31.79 billion because of refinancing and as new loans were taken to repay old ones. Earnings from the IPPs were insufficient to cover financing.
• Some of the funds for the IPP purchases were raised via the issue of RM3.5 billion in notes. The issue was handled by Goldman Sachs and had several irregularities, including lack of proper approvals, unfavourable terms and incomplete documentation.
Financial position and corporate governance
• Based on its FY2014 statement, 1MDB had RM33.71 billion in debt. This excluded RM8.15 billion in inherited loans from two IPPs. Its assets stood at RM51.41 billion. From 2010 to 2014, it took out RM42.88 billion in loans but did not generate enough cash to repay those loans.
• As at Oct 31, 2015, 1MDB owed RM55 billion and had assets of RM58.6 billion. RM20.31 billion of its loans are guaranteed by the government. Assuming a rationalisation plan is completed and no new loans are signed, 1MDB would need RM42.26 billion to repay its loans and interest due from November 2015 to May 2039.
• On the whole, corporate governance and internal controls at 1MDB are unsatisfactory. Important investment decisions were made without detailed discussion or analysis and in a short time frame. Incomplete information was provided to the board. Decisions were made without board approval or against board and shareholder wishes. Management provided incomplete or conflicting information to important parties. Records at 1MDB are unsystematic and unsatisfactory.
This story first appeared in The Edge Singapore (Issue 831, week of May 21) which is on sale now. Get your copy today.
