QUESTION TIME 1Malaysia Development Berhad (1MDB), our self-styled strategic development company, has concluded its strategic review process, led by its new president Arul Kanda, marking the occasion by issuing a press release on Feb 18, a day before Chinese New Year when things were winding down.

But looking at the details contained in the release, there is scant, if any, room for comfort, of which the main one is the assurance that no new investments will be made and no new debt will be raised except for refinancing/meeting existing liabilities. The company will instead “concentrate on its core businesses”.

But even here, one must view this statement with some, no, a lot of scepticism. Considering that its total liabilities amount to RM49 billion or 95 percent of total assets of RM51.4 billion, there is yet considerable room for refinancing and further questionable manoeuvring.

Put another way, 95 percent of assets are funded from other people’s money. It’s gearing level, if we assume that the current portion of liabilities arise out of borrowings as most of them do, is 2,000 percent of shareholders funds. For most listed companies, alarm bells would start ringing at 200 percent. 1MDB is simply an unsustainable edifice erected almost totally on debt.

Surely that’s no way to be for our strategic development company whose effective cost of borrowing - at a time when interest rates were low - was close to 7 percent for much of its debt. Where can one put some RM49 billion to get  a cash return of more than 7 percent or RM3.43 billion required just to pay interest charges, not to mention repayment of debt?

Even if 1MDB went out and bought RM49 billion worth of Malayan Banking shares with its high dividend yield (dividends paid as a percentage of market value) of some 5.8 percent historically, it will still be short by RM600 million.

What strategy is 1MDB employing to right this very wrong state of affairs that 1MDB had started with in 2009 and continued for the next five years, piling debt upon debt with no visible, solid assets to show except for the power assets owned by other Malaysians acquired at a price way above their market value at that time?

Part of 1MDB’s strategic role was to catalyse investment in so-called strategic investments but its only purchase of solid visible assets was to reduce the Malaysian private sector’s role in the power sector here and abroad by putting it into government hands, and at a premium price at that. What prompted them on such a path?

Outrageous claims

And then the press release goes on to make some rather outrageous claims, and here’s a couple reproduced in full:

“1MDB has fulfilled its objectives of acting as an enabler for new ideas and sources of growth, and serving as a catalyst for the development of assets and projects of strategic importance, that would create value for the economy.

“The company’s significant achievements include: consolidating its separate energy assets under Edra Energy with a unified management team and Board; establishing the platform for developing TRX as a financial centre, which has attracted investment interest from major Malaysian and international firms; and successfully positioning the Bandar Malaysia development master-plan to include the Malaysian terminus for the High Speed Rail link to Singapore, along with two MRT lines for seamless intra-city connections.

Really? How so? It’s power assets purchase is a retrograde step, effectively removing private sector ownership of major power stations here and abroad and putting it into government hands by using borrowed money. It failed in its objectives.

What about its much-touted property projects - the Tun Razak Exchange or TRX or the Bandar Malaysia Development. Surely property development, which many of our developers know a lot about (re: The RM40 billion Battersea in London being undertaken by Malaysian entities), is not strategic any more.

And even if they are what’s the reason for getting Abu Dhabi involved to the tune of RM18 billion in 1MDB? Surely such involvement will dilute the ultimate benefit to Malaysia when prime properties which 1MDB obtained cheaply from the government are jointly developed with other countries.

As at March 31, 2014 1MDB’s accounts show  liabilities of RM49 billion of which at least RM46.1 billion are borrowings. If we take about RM11 billion out as payment for power assets, there is still RM34.1 billion in other investments. Where are these?

Why does 1MDB need to borrow at least RM46.1 billion when it has immediate need for just RM11 billion? Property development, which is its only other core business apart from power, does not need all that money upfront. You go for financing in stages as and when you need them. You never, ever borrow all you need in one go. What was 1MDB thinking?

KiniBiz was the first to point out that mispricing bonds downwards was an easy way to make money. That article written in March 2013 estimated that at least RM4 billion could have been siphoned off by mispricing loans too low in its first few tranches of borrowings of up to RM20 billion.

Penchant for borrowings

Those who obtained the bonds cheaply just have to flip it on the market to make a killing. 1MDB meantime pays high interest rates for as many as 30 years. The question is whether this is why it had such a penchant for borrowings and issuing bonds.

Why is it that 1MDB, when it should be rather liquid, is unable to even settle some RM2 billion of its short-term loans owed to local banks and reportedly had to turn to tycoon Ananda Krishnan (from whom it bought most of its power assets) to provide bridging finance?

Indeed, why does 1MDB even need to float its power assets to raise money when there should be some RM34 billion lying around the place? Where has it put the money from all its loans and bonds?

As at March 31, 2014, its accounts show that it had deposits, cash, and bank balances  of RM9.1 billion and ‘available-for-sale investments’ of RM13.3 billion, giving a total of RM22.4 billion. Why does it even need to borrow and what kind of investments has it invested in?

Of this total, RM17.4 billion were listed as current assets, essentially those that can be liquidated within a year. With this kind of liquid assets, it is a real mystery why 1MDB has to scramble all over the place and attract so much public attention over the payment of short-term borrowings of a mere (in comparison) RM2 billion in short-term loans.

Such behaviour has very understandably raised concerns and thrown negative perceptions on whether major banks may be affected by a possible default by 1MDB on its loans. Meantime, financially savvy market players on the bond markets have demanded much higher yields on 1MDB bonds, resulting in the bond prices tumbling.

There can be only one explanation for that - despite what are effectively government guarantees on much of 1MDB’s bonds, players are now less confident that 1MDB will indeed pay back the money.

It’s pretty clear that so far IMDB’s so-called strategic review process is just so much hot air and offers no answers about 1MDB’s past and extremely little insight as to how to take 1MDB forward.

Considering that even the safety of our banks have been questioned and our sovereign debt rating is being affected as a result of 1MDB’s reckless and feckless behaviour with no accountability whatsoever, it is more than time that something serious is done about this.

So far Arul Kanda has been disappointing to say the least. The first thing he should do to restore confidence in 1MDB is to show us the money - tell us where 1MDB’s money is in terms that we can all understand and show us the proof.

That at least might help alleviate increasing perception and fear that 1MDB may not be able to account for its money. Surely as ultimate shareholders of 1MDB all Malaysians are entitled to ask its management and board to show us OUR money!

P GUNASEGARAM is founding editor of business news portal KiniBiz .