By P. Gunasegaram
Standard and Poor’s Ratings Services assigned its ‘A-‘ issue rating to the US$3 billion notes, due 2023, issued by 1MDB Global Investments Ltd. (1MDB GI), a wholly-owned subsidiary of government investment fund 1Malaysia Development Bhd (1MDB). It also assigned a ‘axAAA’ ASEAN regional scale rating on the notes.
The rating on the notes facility is equal to the long-term foreign currency sovereign credit rating on Malaysia, based on the expected timely financial support from the government of Malaysia, S&P said in a press release.
This confirms a Bloomberg report last month that 1MDB had raised US$3 billion (RM9.3 billion) in debt papers. This is on top of RM5 billion bonds it issued in May 2009 and US$1.75 billion (RM5.4 billion) it issued in May 2012, making in all a total of nearly RM20 billion.
KiniBiz ran a series of articles on 1MDB, including possible mispricing of bonds earlier. 1MDB GI is a special-purpose company established by 1MDB in the British Virgin Islands to issue the notes. 1MDB and the government will support the payments when the notes mature, S&P said.
The rating on the proposed notes is equal with that of Malaysia to reflect Standard & Poor’s view of the strength of documentation supporting the transaction and the country’s willingness to support the payment obligations of 1MDB GI under the notes.
The government’s intention to financially support the payments of the notes is expressed in a letter of support. The letter constitutes legally enforceable obligations of the government to ensure full and timely payments by the issuer under the notes.
This may be done by the government making payments to the trust account to pre-fund principal and interest payments by 1MDB GI to noteholders should 1MDB or 1MDB GI be unable to pay on time or in full.
However, the government doesn’t directly issue or guarantee the notes. Should
the government fail to honor the obligations, a claim under the letter of support would be for damages for breaches of contract, rather than the amount of principal and interest of the notes.
In this regard, the letter of support is different from a guarantee by the government, S&P said.
The rating on the notes is also dependent on the credit quality of the trust account, including the account bank provider.
The net proceeds from the 1MDB GI notes will be used for funding Abu Dhabi Malaysia Investment Co. Ltd. (ADMIC). ADMIC is a 50:50 joint venture between 1MDB and Aabar Investments P.J.S., which itself is a 95.47 percent owned company of International Petroleum Investment Co. P.J.S.C., which is wholly owned by the government of the Emirate of Abu Dhabi. ADMIC will invest in various projects for the strategic interest of Malaysia and Abu Dhabi.
ADMIC is a start-up company and is exposed to risks relating to the start-up business such as an untested management and investment risks.
The sovereign rating on Malaysia reflects the country’s strong external liquidity position, its open and competitive middle-income economy, and high savings rate (gross saving rate at 31.8 percent of GDP in 2012), S&P said.
The country’s foreign reserves stood at US$127.1 billion at the end of February 2013,
compared with US$121.0 billion the year before, sufficient to finance 6.1 months of current account payments. However, the country’s moderately weak fiscal and government debt profile for the rating category constrains the sovereign rating, the rating agency said.
S&P expects the growth in general government debt in 2013 will be about 4.0 percent, similar to 2012’s level. “In our view, the slow fiscal consolidation stems from the high subsidies and the relatively weak revenue structure; Malaysia depends largely on petroleum-related revenues.”
The government has been planning to reform the subsidy system and introduce a goods and services tax. However, given the political sensitivities, S&P expects significant implementation, if any, would only be after the general election on May 5, 2013.
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