Beleaguered 1Malaysia Development Berhad (1MDB) won some welcome respite last week after local investors said they would take no action on a cross default on RM$7.4 billion (about US$1.89 billion) of ringgit-denominated bonds.

Market sources said major bondholders, holding about a quarter of the RM$5 billion government-guaranteed 5.75 percent due 2039s, were unlikely to accelerate the bonds after the state-owned fund triggered a cross default last Monday, following a missed coupon on notes of US$1.75 billion, carrying a guarantee from an Abu Dhabi sovereign wealth fund.

"We are on the same page," said one bondholder. "We will not urge an acceleration of the bond."

Investors holding 75 percent of the bonds will need to call for an acceleration of payment in order to force early redemption - a move that will challenge 1MDB's restructuring efforts. With around 25 percent already on board, and other bondholders either state-owned or seeing nothing to gain from rocking the boat, that is highly unlikely to happen.

"There are big investors in the bonds, such as state-owned funds like Kumpulan Wang Persaraan and Kumpulan Wang Simpanan Pekerja," said another investor, who does not hold 1MDB bonds.

"They won't make a call on the bonds."

Other parties are showing less patience. Bank Negara Malaysia, the central bank, fined the fund an unspecified amount last Thursday and is demanding that 1MDB repatriate fund from abroad by May 30. These funds are related to a total of US$1.8 billion of foreign transfers that BNM had approved between 2009 and 2011, and then revoked in October last year.

Last Monday, 1MDB failed to pay a US$50.3 million coupon on a US$1.75 billion 5.75 percent 2022 1MDB bond with a guarantee from International Petroleum Investment Co. It said this had triggered cross defaults on the 5.75 percent 2039s and subsidiary Bandar Malaysia's series of bonds amounting to RM2.4 billion.

Investors in the Bandar Malaysia notes are also not expected to call for an acceleration of the bonds.

The cross defaults did not affect a RM800 million loan from the Social Security Organisation, but could instead be impacted by the "material adverse effect" clause, 1MDB said. That loan also carries a federal government guarantee.

There is no cross default on the remaining US$1.75 bilion 5.99 percent bond via 1MDB Energy and the US$3 billion 4.4 percent bond via 1MDB Global Investments.

1MDB said it had sufficient funds to pay the interest, but was withholding payment as its stance was that IPIC had the obligation to do so.

"Until IPIC accepts that all obligations have been met, 1MDB is obliged to withhold payments and will seek legal recourse and resolution," the statement said.

Breathing space

The dispute between IPIC and 1MDB arose after the Abu Dhabi fund said it was still owed US$1.1 billion and would cancel a 2015 agreement to service interest payments on US$3.5 billion of 1MDB bonds it had guaranteed.

IPIC said last Monday it would make the US$50.3 million interest payment only after 1MDB defaulted on its payment obligations - in line with its original guarantee. As a result, it will have 10 days to cure the default, which means investors will find out by May 9 if IPIC makes good on its promise.

1MDB, however, maintains that it has made the US$1.1 billion payment to a British Virgin Islands-incorporated entity, called Aabar Investments PJS Limited, but IPIC says that the company has no connection with itself or Aabar Investments PJS, in which IPIC holds a 98 percent stake.

Meanwhile, the trustees of the ringgit bonds are believed to be preparing documents in anticipation of 1MDB's move to seek bondholder consent to waive the cross default.

"There is no point in accelerating the bond now as doing that will mean we get back our investments at par," said the bondholder. "We will lose any premium from where the bond is trading now."

This will give breathing space to Prime Minister Najib Abdul Razak, who has faced calls to resign over 1MDB's debt woes.

Najib founded the fund, which was transformed from the Terengganu Investment Authority in 2009. Najib is also chairpeson of 1MDB's board of advisers.

News of the cross default did not dent the ringgit bond due 2039s, which were trading at a cash price of around 110-111. The sovereign's five-year credit default swaps climbed around 5bp when 1MDB reported the cross default on Monday, but have since been range-bound at around 161bp-169bp.

The outstanding US dollar bonds due March 2023 were lower last Thursday at 87.3/87.6 against 89.4/89.7 last Monday.

1MDB said it had updated bondholders on the developments. It had also briefed them of its "successful rationalisation plan" to meet its debt obligations. The ongoing plan involves the sale of the Edra Global Energy power assets, the sale of land at Bandar Malaysia and a debt-for-asset swap agreed with IPIC.

If local investors appear comfortable with 1MDB's credit risk for the moment, rating agencies are less sanguine about the outlook for the sovereign.

Moody's said contingent liabilities could crystallise on Malaysia's government balance sheet, which was a credit negative for the sovereign. It estimated that the default could lead to contingent liabilities that would add up to around 2.5 percent of Malaysia's gross domestic product.

Fitch said the developments would not have an immediate impact on Malaysia's sovereign ratings.

"More broadly, Fitch believes (the) developments reflect Malaysia's relative weak governance standard, which the agency has cited as a weakness in the credit profile," said Fitch's sovereign ratings associate director, Sagarika Chandra.

Attention will now turn to the IPIC-guaranteed 5.99 percent notes due 2022, on which a coupon payment is due on May 11.

- Reuters