By P. Gunasegaram
In the third of our second series of articles on 1MDB, KiniBiz takes a detailed look at the latest available accounts and comes up with some interesting nuggets. A new company SRC International Sdn Bhd has come into the picture which 1MDB has transferred to the Ministry of Finance together with RM1.78 billion in cash that it holds. Meantime, 1MDB continues to make losses if not for property revaluations and is not in great shape.
1Malaysia Development Bhd’s accounts show up another company which may play a future role independent of 1MDB. This company, SRC International Sdn Bhd, which has huge cash and near-cash items amounting to RM1.78 billion, was transferred to be directly under the Ministry of Finance (MOF) via yet another convoluted process.
Meantime up to Mar 31, 2012 1MDB was basically a company devoid of any businesses and had lots of loans which it effectively on-lent to others. It had no significant income-generating businesses, but continued to show a profit only because of revaluation of property which it had obtained cheaply from the government.
SRC was initially a wholly-owned subsidiary of 1MDB. How it came to be holding RM1.78 billion in cash and near cash items is not clear from the accounts. On 15 Aug, 2011, SRC’s paid-up capital was increased from RM2 to RM1 million.
On 14 February 2012, 1MDB effectively transferred the whole of SRC to its sole shareholder, MOF, via a dividend payment. But not before SRC’s wholly-owned subsidiary, British Virgin Islands (BVI)-incorporated SRC International (Malaysia) Ltd had made some acquisitions.
The BVI company effectively has a 50% stake with effect from Dec 1, 2011 in Aabar-SRC Strategic Resources Ltd comprising 60 million shares of US$1 each. In Nov 7, 2011, the same BVI company had acquired an 85% equity interest in PT SRC Indonesia, a company incorporated in Indonesia, for US$1.7 million.
Aabar has stake in RHB Cap
Presumably, this Aabar-SRC is a joint venture with Abu Dhabi investment company Aabar Investments PJS with which the Malaysian government has strong links. Six months earlier in June 2011, Aabar Investments bought a 24.9% stake in Malaysia’s fourth largest banking group RHB Capital from Abu Dhabi Commercial Bank.
The signing of the agreement was witnessed by General Sheikh Mohammed Bin Zayed Al-Nahyan, the Crown Prince of Abu Dhabi, and Malaysian Prime Minister Najib Abdul Razak.
Subsequently the two of them signed a government-to-government collaboration agreement in Mar 2013 and as part of these, the two countries may be engaged in projects worth some RM18 billion.
1MDB has said that it is ready to kick start the operations of the “strategic” RM18 billion Malaysia-Abu Dhabi economic partnership, after successfully raising US$3 billion for investments in “strategic and important high-impact projects like energy and strategic real estate”.
The government’s strategic development vehicle would be through the 50:50 joint venture company, Abu Dhabi Malaysia Investment Company (ADMIC). Problem is this company does not have the same name as the company, SRC, that 1MDB transferred to the MOF, raising questions as to what exactly SRC is for and adding to the long list of questions that 1MDB still has to answer. But then again, the name could have been changed by now.
No announcements earlier
1MDB did not make any of these announcements earlier and the interesting thing about this entire transaction is that 1MDB has spun out SRC to MOF and that SRC had at that time a huge cash and near-cash stockpile of RM1.78 billion. This has to have come from 1MDB’s earlier borrowings through its RM5 billion 30-year bond and other term loans.
A check with the Companies Commission of Malaysia shows no directors listed for SRC International Sdn Bhd, no profit and loss account and no other details, more than a year after its ownership was transferred to the MOF with RM1.78 billion of funds.
Other aspects of the accounts
The accounts does not paint a pretty picture in other aspects. It shows that despite it having a good margin of some 200 basis points or two percentage points over most of its loans by on-lending to its erstwhile partner, Petrosaudi International Ltd, at a higher interest, there is no profit from its financial activities because of a variety of losses not fully explained in the accounts.
For the year ended Mar 31, 2012, 1MDB made group a pre-tax profit of RM44.7 million, which was already sharply down by more than 90 percent from the RM544.3 million it made in the previous corresponding year.
Revaluation gains
But if not for a gain on revaluation of investment properties of RM570 million, it would have made a loss of RM525.3 million, which repeats a trend of previous years of making profits from such revaluations of land which had been obtained cheaply from the government.
For the previous year, it made a revaluation gain on property of RM827.6 million without which it would have declared a loss of RM283.3 million. If we strip out the property revaluation gains, 1MDB made a pre-tax loss of RM525.3 million for the year to Mar 31, 2012, deepening its losses by RM242 million.
It seems like the main reason that 1MDB is revaluing its property assets is to show that it is making a profit.
But hang on, you say, what about the RM6.81 billion murabaha facility to PetroSaudi, what has happened to that? Doesn’t that give income? The accounts show a murabaha profit of RM510.6 million but this is more than wiped out by a revaluation loss arising from the same facility of RM516 million. Somehow, even that does not provide a profit.
The balance sheet
The balance sheet indicates that apart from land held for development, which was revalued to RM1.78 billion, there were few other assets but the RM6.8 billion murabaha Islamic financing facility to PetroSaudi.
On the other side of the balance sheet, total liabilities amounted to RM8.38 billion, out of which RM7.82 billion were loans and borrowings. Equity was rather token because paid-up capital was a just RM1 million and accumulated equity it has mainly reflected revaluation surpluses from earlier revaluations of property.
Total equity or shareholders’ funds as at Mar 2012 amounted to RM$1.16 billion. In the last two years alone, gains that it made on revaluation of property amounted to RM1.4 billion, clearly indicating that most if not all of the equity accumulation came from this.
Cash flow a tale of woe
As can be expected, operating cash flow before working capital changes were in deficit by RM80.5 million the deficit increasing from RM42.3 million for the previous year. Including working capital changes, it widened to RM133.7 million from a surplus of RM229 million previously.
Net cash used in investing activities show RM1.018 billion used for additional purchase of the murabaha facility to PetroSaudi while disposal of subsidiary SRC to MOF resulted in a loss of cash of RM1.78 billion. In all cash used up for investing went up to RM3.35 billion from RM1.96 billion previously.
1MDB basically increased its borrowings by RM2.71 billion (RM2.1 billion previously) to finance the operations and the investments.
Since the balance sheet, 1MDB has bought power assets of some RM10.8 billion at what could be inflated prices.
It said it has also effectively obtained sales proceeds of US$2.318 billion (RM7 billion) from its murabaha facilities. Meantime, there was also a loan of US$1.75 billion (US$5.5 billion) earlier, which should have taken its cash position to RM12.5 billion.
That would be enough to pay for its RM10.8 billion power acquisitions, leaving some RM1.7 billion in loose change for incidentals. As for its so-called strategic property development projects, it needs finance as and when it starts to develop. Bridging finance is easily available from our cash-flush banks, especially for federally guaranteed loans.
Instead, 1MDB invested the RM7 billion it obtained from the sale of murabaha notes on Sept 12, 2012 in various classes of participating shares in a segregated portfolio company all the way in the Cayman Islands.
If it had not reinvested the RM7 billion it would have had enough funds for the power investments and there would have been no hurry to go for another, highly questionable and huge US$3 billion bond issue. Really, what is the hurry? And why the secrecy? 1MDB is yet to explain satisfactorily despite its statement yesterday reproduced in full below.
Tomorrow: The Goldman Sachs connection
Yesterday: Mysterious RM7 billion investments in Cayman Islands
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Full text of 1MDB’s statement yesterday:
Baseless allegations as elections ploy
Media statement by 1MDB issued by Corporate Communications Department on 23 April 2013.
1MDB’s funds are safe and will be used for strategic investments for sustainable returns
1Malaysia Development Berhad (1MDB) firmly states that the US$2.318 billion as stated in its audited accounts is safe.
These are proceeds and profits originating from its initial 1MDB-PetroSaudi International joint venture. This fact is clearly reported in the company’s audited account that is publicly available from the Companies Commission of Malaysia and has been independently audited by a global reputable and established firm.
1MDB regrets however that certain quarters with political agendas have hidden facts to persistently make baseless allegations. This is a smear campaign for their own intended benefit. The notion that these monies were put in Cayman Islands companies and will vanish is based on a lie perpetuated by these quarters and is completely absurd.
1MDB has earmarked the proceeds for investments in the near future. Pending that, these funds for cash management purposes are currently placed under regulated and licensed international fund managers managing Cayman Island based international standard fund structures.
Cayman Islands had in August 2009 joined the global OECD “white list” of countries using internationally recognised tax standards. OECD is the Organization for Economic Cooperation and Development which has set a benchmark for greater transparency and freer exchange of information to counter bank secrecy. Global reputable international funds and fund managers all manage Cayman Island based funds as it is an established and well regarded jurisdiction for set-up and management of funds.
1MDB is Government-owned and supported but driven by private sector thinking and practices. It strives to fulfill the aspiration of the Government with the agility of the private sector. Bonds raised are part of capital for the strategic initiatives it undertakes.
The recent US$3 billion capital raised is an integral part of the Government-to-Government collaboration between Malaysia and Abu Dhabi on a strategic partnership sealed on 12 March 2013 during the official visit by Abu Dhabi’s Crown Prince and Deputy Supreme Commander of the Armed Forces of the United Arab Emirates, His Highness General Sheikh Mohamed Bin Zayed Al Nahyan.
Both countries are committed to now kick-start the operations of this strategic RM18 billion partnership. Malaysia and Abu Dhabi has maintained a long standing economic partnership and the ADMIC initiative is no exception and independent of the elections and should not otherwise be misconstrued.
Various statements that have been quoted with respect to pricing and structure from unnamed sources in the media are inaccurate.
As a prudent government owned entity, 1MDB considered all of its options (pricing, structure, investment bank, and others) in the recent financing and chose the optimal path in light of the various considerations. The company stressed that 1MDB opted for a private placement to ensure the timely completion of this economic initiative.
The proceeds from the US$3 billion capital raised will be utilised for investments in strategic and important high-impact projects like energy and strategic real estate which are vital to the long term-economic growth of both countries. 1MDB’s Tun Razak Exchange (TRX) is representative of the types of projects ADMIC is expected to invest in.
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