By KINIBIZ
With a new man at the helm, controversial strategic development company 1Malaysia Development Berhad (1MDB) is finally engaging its various critics and controversies on its dealings over the past few years. But 1MDB still leaves more questions than answers after a response to various questions posed by KiniBiz.
1MDB talks on Cayman Islands, fighting fire and paper gains
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Despite high fees, loans taken out by strategic development entity 1Malaysia Development Berhad (1MDB) were likely believed to be in its best interests, said newly-minted chief executive officer Arul Kanda.
In an emailed response to KiniBiz, Arul said financing fees are subject to varying conditions specific to the arrangement and that there is “no one-size-fits-all solution when it comes to raising debt”.
“The benefit of hindsight makes it very easy to criticise decisions made in the past, but I’m sure that at that time, the decision made by the company was one that that it believed served its best interests,” said Arul to KiniBiz.
Arul was responding to a list of questions KiniBiz previously emailed to his office.
However Arul only responded to 10 out of 21 non-exhaustive questions sent by KiniBiz, citing time constraints due to a number of media commitments on top of acquainting himself with his new role.
While his office initially asked KiniBiz to specify which 10 questions require more urgency, KiniBiz left the selection for Arul to decide. The company had also promised to arrange for a face-to-face interview with KiniBiz “as soon as possible”.
His response is reproduced below in full followed by the remaining unanswered 11 questions, which among others queried the mispricing of 1MDB’s bonds, the obscurity of the fund management firm in charge of its billions in the Cayman Islands as well as why 1MDB engaged Goldman Sachs for advice despite the latter’s controversies and existing expertise among local banks.
On fighting fires
KiniBiz: What are the biggest fires you see at 1MDB at the moment?
Arul Kanda
Arul: I think the biggest challenge facing the company at the moment is a cosmetic one, by which I mean the negative perceptions that have been allowed to build up around the company. There has been an enormous amount of speculation around 1MDB, often consisting of unfounded allegations, and it is quite clear that these haven’t been addressed as effectively as they should have in the past.
Unfortunately, this has led some to question the company’s levels of transparency, but I hope our efforts to engage in a more frank and constructive dialogue, than has perhaps been the case in the past, is reflective of our commitment to being more open.
Beyond this, I am currently in the midst of conducting a thorough and analytical strategic review of the business. This should allow us to develop a greater understanding of our strengths and weaknesses, and will help us identify the challenges that need to be addressed.
Whilst it is still early days, from what I have seen thus far, I think there are measures we can take to extract greater value from our assets as well as manage our finances in a more efficient way.
KiniBiz: There are conflicting views on whether the situation at 1MDB is alright or extremely worrying. What is your take on the situation at 1MDB upon assuming your new role?
Arul: Every company faces challenges from time to time. In fact, I have yet to come across
a company that hasn’t faced challenges at some point. In that vein, if someone were to ask me whether this is a challenging time for the company, I would have to say yes. However, I think the bigger question is how the company responds to these challenges and, indeed, whether it has the ability to overcome them. To this, my answer would also be an unequivocal yes.
On high interest rates and Cayman Islands
KiniBiz: Why did 1MDB pay such high fees for its loans?
Arul: I believe this is a point the Chairman of our Board of Directors has made in the past
but, like any business, it is in 1MDB’s interests to secure the lowest rate of interest and finance costs when taking out a loan.
In certain instances, the company may have incurred fees that were towards the higher end of the market rate, but it is important to understand that there is no one size fits all solution when it comes to raising debt on the financial markets: What applies today needn’t have applied three years ago, what applies to another company needn’t apply to 1MDB, and vice versa.
The fact of the matter is that a number of factors determine the finance costs and the interest rate applied to a loan or bond issuance. These include the length of maturity, whether the loans are underwritten or guaranteed, macro-economic factors, and many more.
The benefit of hindsight makes it very easy to criticise decisions made in the past, but I’m sure that at that time, the decision made by the company was one that that it believed served its best interests.
KiniBiz: Why did 1MDB look at the Cayman Islands for investing and put billions for paltry returns? What was the attraction there?
Arul: I presume you are referring to the company’s proceeds of approximately US$2.3 billion (RM8.3 billion) from its investments in a joint venture with a Saudi Arabian company, which have now been redeemed in full, as per a statement issued by the company on 13 January 2015. The company received these proceeds in US dollars and, consequently, made the decision to maintain them in dollar-denominated accounts in order to meet 1MDB’s dollar financial obligations and help mitigate its foreign exchange risks.
The proceeds were invested in a Cayman Islands’ regulated fund for the same reasons
international banks and multinational companies routinely invest in such funds.
The Cayman Islands is one of the largest registered fund jurisdictions internationally, with the Cayman Monetary Authority recognized as one of the leading fund regulators in the world. Thousands of blue chip companies from around the world, including numerous American and over 200 Malaysian companies, have investments in Cayman Island regulated funds.
On power assets
KiniBiz: Why did 1MDB choose to go into the power sector?
Arul: 1MDB’s focus on the power sector stems from the Government’s strategic aim of ensuring Malaysia’s energy security, with sustainable provision of power seen as being critical to maintaining investor confidence and supporting the economic growth of the country. Today, our energy business comprises a portfolio of 15 power and desalination plants in five countries, with a net power generation capacity of 5594MW, making us the second largest independent power producer in Malaysia.
KiniBiz: Why did 1MDB buy power assets as premium prices given they were close to expiring at the point of purchase?
Arul: I believe this is a question that has been addressed by the company in the past.
Like any business, we only acquire assets when we are convinced that they represent compelling value. These acquisitions have provided us with healthy cash flows and the expertise of their excellent management teams. Furthermore, they have allowed us to diversify our fuel mix and country risk, and enable us to participate in bids for coal and gas fired plants (the two primary fuel source for power generation assets in the markets that 1MDB operates in) allowing us to create further value and drive the company’s future growth.
As such, we believe that the value paid for these assets is commensurate with their existing and future potential.
On property
KiniBiz: Why is 1MDB in the property business given the headwinds in the sector right now?
Arul: As a strategic development company, we take a long – not short – term view. TRX, for
example, has a development period of 15 to 20 years and will be built in demand-driven phases, with the initial phase of construction scheduled for completion in 2017/18. As such, whilst the property sector may be experiencing headwinds at the moment, this has limited impact on our projects due to their long-term nature.
KiniBiz: Shouldn’t 1MDB as a state investment fund look at economy-driving sectors and businesses to invest in as opposed to property, which is driven by the economy instead?
Arul: First of all, I want to clarify that 1MDB is a strategic development company, not a
state investment fund. And, as a strategic development company, we are tasked with driving the sustainable long-term economic development and growth of Malaysia.
The fact that we are a Government-owned company, but have an independent management team, means we are able to combine the practical support of the Government with private sector expertise and capital to unlock potential value. As a result, we have a unique ability to clear log-jams, unlock value, and drive forward projects.
This is particularly applicable to real estate projects. For example; we are the master developer of TRX, which will be Kuala Lumpur’s first financial district upon completion. Similarly, we have acquired and intend to transform the land around the old Sungai Besi airport into a new urban mixed-use development that we envisage will serve as a benchmark for sustainable communities in the region.
Our investment, along with the investors and direct foreign investment that we are able to attract from around the world, will transform these areas into thriving new districts. In doing so, they will help create new businesses and create thousands of new jobs, thereby
contributing towards sustainable economic growth in Malaysia.
KiniBiz: Why is 1MDB engaging foreigners to drive its property endeavours? Shouldn’t the benefits of such investments accrue to Malaysians and Malaysian business entities first and foremost given 1MDB’s link to the government?
Arul: TRX is intended to be an international financial centre, helping to attract leading companies from around the world to Kuala Lumpur, where they will work and exist alongside local companies, allowing both to benefit from each other. Not only will this result in an inflow of foreign investment into the country, but it will also create new businesses and thousands of new jobs, thereby contributing towards the sustainable economic growth of the country.
To provide one example; last year, we announced that 1MDB had entered into a joint-venture agreement with Lend Lease, a leading and highly respected international property company, to jointly develop the Lifestyle Quarter at TRX. This followed an RFP process that was open to both local and international companies. The development of the Lifestyle Quarter, which will be spread over 17 of the 70 acres at TRX, is expected to attract up to US$1 billion (RM3.6 billion) in foreign direct investment to the country. This will benefit Malaysia and Malaysians.
KiniBiz: 1MDB had claimed to be profitable for years yet these are driven by paper gains from property revaluations. Why were these done every year?
Arul: I believe you may be referring to 1MDB’s overall return for the financial year ending
March 2014, which benefitted from a fair value adjustment of approximately RM896.8 million to the group’s property portfolio. Whilst this was before my time, I understand that the revaluation reflected a net positive market movement over the period, and was representative of the value generated by the company at its land parcels, specifically TRX and Bandar Malaysia.
These revaluations take into account the investments by the company to prepare the land to be ready for development. For instance; the cost of relocating RMAF bases in the case of Bandar Malaysia, the cost of relocation of residents and businesses in the case of TRX, the costs associated with preliminary groundwork, earthworks and construction, as well as
the costs of the master planning and obtaining the necessary approvals from the relevant authorities. These investments add value to the assets, which is then reflected in the company’s accounts.
Tomorrow: KiniBiz responds to 1MDB
The remaining 11 questions, which are not exhaustive:
1. Why were 1MDB’s bonds badly mispriced?
2. Why did 1MDB take short-term financing for “strategic” long-term investments?
3. Who is Bridge Capital and Avestra Asset Management? Why is Avestra, managing billions, operating from an address that looks like a townhouse in Gold Coast, Australia?
4. Why did 1MDB borrow so much yet leave billions lying in the bank for pittance in interest rates?
5. Why did 1MDB choose to buy expiring power purchase agreements which were subsequently extended following 1MDB’s purchase? Did 1MDB had advance knowledge of these extensions?
6. Why did 1MDB change auditors?
7. Why did 1MDB choose Goldman Sachs as adviser despite many past controversies and issues with the company? Do we not have sufficient expertise among our local banks?
8. What sort of due diligence did 1MDB undertake before selecting Bridge Capital and Avestra Assets Management?
9. Does Ananda Krishnan’s Usaha Tegas have rights to parts of Tanjung Energy should 1MDB default on the second tranche of its two-year RM2 billion loan for the power assets?
10. Why was 1MDB in such a hurry to raise so much funds at the outset that it chose bridging loans? Would 1MDB not have known at the time that it would be eyeing long-term investments, meaning at some point cashflow would be an issue?
11. Middle eastern interests under Aabar Investment PJS and Ananda Krishnan’s Tanjong Public Limited Company (Tanjong) have the option to take significant stakes in Powertek Investment Holdings. How much of a stake is Tanjong entitled to purchase in Powertek?
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