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Published: Saturday May 17, 2014 MYT 12:00:00 AM
Updated: Sunday May 18, 2014 MYT 4:52:09 PM
1MDB wants money to come
back to Malaysia but what kindofreturns wouldtheinvestments have yielded?
BY M. SHANMUGAM, GURMEETKAUR, AND WONG WEI-SHEN
http://www.thestar.com.my/Authors?q=%22M.+Shanmugam%22http://www.thestar.com.my/Authors?q=%22Gurmeet+Kaur%22http://www.thestar.com.my/Authors?q=%22Wong+Wei-Shen%22http://www.thestar.com.my/http://www.thestar.com.my/Businesshttp://www.thestar.com.my/Business/Business-Newshttp://www.thestar.com.my/Business/Marketwatchhttp://www.thestar.com.my/Business/Market-Eventshttp://www.thestar.com.my/Business/Investinghttp://www.thestar.com.my/http://www.thestar.com.my/http://www.thestar.com.my/http://www.thestar.com.my/http://www.thestar.com.my/Authors?q=%22Wong+Wei-Shen%22http://www.thestar.com.my/Authors?q=%22Gurmeet+Kaur%22http://www.thestar.com.my/Authors?q=%22M.+Shanmugam%22http://www.thestar.com.my/Search?adv=1http://www.thestar.com.my/Businesshttp://www.thestar.com.my/http://www.thestar.com.my/Business/Property-Newshttp://www.thestar.com.my/Business/SMEhttp://www.thestar.com.my/Business/Investinghttp://www.thestar.com.my/Business/Market-Eventshttp://www.thestar.com.my/Business/Marketwatchhttp://www.thestar.com.my/Business/Business-Newshttp://www.thestar.com.my/Travelhttp://www.thestar.com.my/Lifestylehttp://www.thestar.com.my/Techhttp://www.thestar.com.my/Sporthttp://www.thestar.com.my/Businesshttp://www.thestar.com.my/Newshttp://www.thestar.com.my/http://www.thestar.com.my/7/23/2019 1MDB Wants Money to Come Back to Malaysia but What Kind of Returns Would the Investments Have Yielded_ -
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UNDER pressure for keeping a large amount of money outside the country since
2010, the board of 1Malaysia Development Bhd (1MDB) has resolved to bring funds
back in the current financial year of operations.
Towards this end, it is learnt that the board of 1MDB, headed by Tan Sri Lodin Wok
Kamaruddin, has told the management that a sum of US$2.3bil (RM7.42bil) that is
kept in a private bank in Switzerland and managed by a company based in Hong
Kong has to be brought back for projects locally.
1MDB has to shore up its finances locally, as the property development and power-
generation businesses pick up pace locally.
The board has not been comfortable with the arrangement for some time now.
It wants to bring the money back, which is why the US$2.3bil in assets has been
classified as available for sale in the 2013 accounts, says a source.
However, the returns on the funds remain a nagging question because not much is
31
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known about where the money has been invested.
According to reports, the funds are placed with a private bank in Switzerland, which
is the custodian of the money. It is managed by a firm in Hong Kong Bridge
Partners that has placed the money in six funds with exposure to the energy sector.
According to reports, the investments are mainly in unlisted companies.
It has also been reported that Bridge Partners has issued six interest-free promissory
notes with one-month expiries to a wholly owned subsidiary of 1MDB. This is to
facilitate the withdrawal of the funds within a months notice but without interest being
paid.
So far, there has not been any indication as to the value of the six funds or what the
assets that the funds have invested in are.
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Bridge Partners total funds under management or the kind of returns they generate
are also not available.
Questions to 1MDB on the details of the investments and the involvement of Bridge
Partners were not answered.
Why KPMG left
Deloitte signed off the accounts of 1MDB for the financial year ended March 31,
2013, which was controversial to begin with because there was a delay and a change
in the auditor. The accounts were completed after a six-month extension that the fund
had sought and obtained from the authorities.
Deloitte came into the picture to replace KPMG late last year. According to 1MDB,
KPMG could not complete the accounts and so was replaced. But in the accounting
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world, rarely does a firm leave a job half-done, especially when it involves a big client
like 1MDB.
Sources say that the primary reason why KPMG could not complete the accounts
was because it was not able to penetrate beyond Hong Kong to get an idea on the
value of the assets backing the US$2.3bil investment.
According to an accountant, auditors will normally walk away if they are unable to get
a full picture.
Its more the case in 1MDB, he says.
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It is learnt that Deloitte had hit some roadblocks in Hong Kong but managed to
overcome it. Subsequently, it got a statement from a private bank in Switzerland to
verify that the money was there and was managed by Bridge Partners.
The private bank is the custodian of the US$2.3bil and was given the mandate from
an offshore company registered in Cayman Islands. The offshore company is wholly
owned by 1MDB. However, it remains unclear if Deloitte managed to get a peek into
the kind of assets backing the said US$2.3bil investment.
According to accounts, Deloitte has tagged a fair value of RM7.18bil on the assets
that are classified as held for sale. It is based on the net asset value of the fund
provided by an independent administrator.
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Valuation issues
At the current exchange rate of RM3.23 to the US dollar, the RM7.18bil works out to
some US$2.22bil. This means that the value of the asset has not appreciated or
depreciated much since it was invested.
This raises the question on the kind of returns that 1MDB would get should the moneybe brought back in the next few months.
Would 1MDB see some returns on the investment above the principal amount? Or
would it get back the principal amount alone?
So far, the returns from investments in the fund are far from encouraging. On Sept
12, last year, 1MDB received US$133.4mil in cash dividends and a capital
distribution of US$65.4mil. The fund announced that the return was 5.76%.
The returns are marginally higher than the 5.75% coupon rate that 1MDB is paying
for its 30-year debt paper issued in 2009.
However, the return pales in comparison to what 1MDB was earning when the money
was advanced to PetroSaudi International Ltd (PSI) as an Islamic debt paper.
Between 2010 and 2012, 1MDB disbursed a total of US$2.03bil to PSI by subscribingto the debt papers issued by the company that is established in Saudi Arabia.
The returns on the debt papers were between 8.25% and 8.67%, which were much
higher than the returns that the fund is giving.
Not much is known about the mandate that Bridge Partners has over the funds and
the investment horizon.
The paltry returns could be due to several reasons beyond the control of the fund.
For one, the investments could probably require a longer gestation period before the
fund could give out better returns.
Another reason could be that the fund may not have fully invested yet to give the
desired returns.
Apart from the US$2.3bil, US$3bil was placed under the custody of an overseas
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financial institution likely to be based in Switzerland in March 2013. It was a few
weeks before the books closed for the financial year.
There is no doubt that 1MDB will have to bring back the funds. As the projects in
Malaysia pick up pace, it cannot keep on issuing debt papers to support them.
The question now is on the returns that the funds have generated being placedoutside Malaysia, because not much is known about where and the kind of assets the
money was invested in.
Related Story:
Who is Bridge Partners?
Key personalities of 1MDB
TAGS / KEYWORDS:
Business, 1mdb valuation
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