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‘With CIMB appointment, 1MDB has abandoned IPO’

MP SPEAKS CIMB Group Holdings Bhd announced on Thursday that they have been appointed by the Finance Ministry (MoF) to find strategic investors for the potential sale of 1Malaysia Development Bhd's (1MDB) energy arm, Edra Global Energy Bhd.

“CIMB’s role will include identifying potential buyers and running a competitive process for Edra to drive an optimal outcome for MoF,” said the bank in a statement.[1]

This is a far-reaching decision which directly implies that 1MDB has all but abandoned the original option to raise funds via an initial public offering (IPO) of Edra Global.  

No company with any confidence with its own business and financial valuation to raise funds via an IPO would concurrently appoint another investment bank to conduct an auction for its assets.

The proposed IPO of Edra Global has already been postponed multiple times since the middle of last year due to its inability to secure a reasonable valuation relative to the price and cost 1MDB had paid for its energy assets.

1MDB had spent a total of RM12.1 billion to acquire 3 power companies – RM8.5 billion for Tanjong Energy Holdings (TEH) (22 May 2012), RM2.38 billion for Genting Sanyen (22 Oct 2012), and RM1.23 billion for Jimah Ventures (21 June 2013).  

These assets have already been impaired by RM1.19 billion in the March 2013 Financial Statements, leaving them with a RM10.9 billion in value.

Incredulous commissions, fees, expenses

To acquire these companies, 1MDB had borrowed RM6.7 billion and US$1.75 billion for TEH, RM700 million and US$1.75 billion for Genting Sanyen and RM600 million for Jimah Ventures.  

Based on current exchange rates, these loans amount to a whopping RM20.9 billion!

In short, 1MDB took RM20.9 billion of loans to acquire its power assets worth only approximately RM10.9 billion.  

Part of the reasons for the outsized loans is due to the nature of the Goldman Sachs-sponsored bond exercises which involved an incredulous 11 percent in “commissions, fees and expenses”, as well as the highly onerous terms placed by Abu Dhabi’s International Petroleum Investment Corporation (IPIC) which provided the guarantee for the US Dollar-denominated bonds.

Hence 1MDB has been desperate to list its energy subsidiary in order to pare down these excessive loans.  

Unfortunately, 1MDB is faced with the double-whammy of having overvalued these assets when they were acquired.

Asset-stripping can't save cash flow problem

As a result, it became extremely difficult to secure a significantly higher valuation despite the numerous lucrative contracts and extensions which the Government has awarded 1MDB last year.

The above announcement also meant that the Second Finance Minister Husni Hanadzlah ( right ) has misled the Parliament during his winding-up speech on the same day.  He said that:

kita telah minta CIMB sebagai third party buat evaluation daripada segi nilai pasal hari itu saya kata kita hendak buat IPO. Biar nilai yang dengan izin , dievaluated, evaluate by 1MDB itu dengan third party, CIMB, kita hendak tengok macam mana nilai supaya kita dapat pastikan bahawa keseluruhan daripada nilai bila buat IPO nanti dapat nilai yang saksama .[2]

Instead of being honest by informing the House that CIMB has been appointed to dispose of 1MDB’s energy assets at the best possible prices, he claimed that CIMB was appointed to provide a third-party valuation of 1MDB’s energy arm, strictly for the purpose of the IPO.

Unfortunately, the desperate asset-stripping attempt, just like the IPO, will be far from sufficient to rescue 1MDB from its chronic cashflow problems.  

In fact, while it may partially reduce 1MDB’s RM42 billion debt burden in the short-term, 1MDB is basically killing the only goose which lays eggs in its gaggle of malnourished geese.

1MDB’s energy assets, although overpriced, are unfortunately the only asset which is revenue-generating and profit-making.

Once disposed, there will be nothing left which generates revenue and profit to repay the balance of the RM30 billion of loans besides its RM7.1 billion of real estate.


TONY PUA is the MP for Petaling Jaya Utara and DAP's national publicity secretary.

[1] http://www.cimb.com/en/news/news/2015/ministry-of-finance-appoints-cimb-to-find-investors-for-edra.html

[2] Hansard 25.3.2015 pp122

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