UAE fund says Malaysia’s 1MDB bonds in default on $1 bln deal

An Abu Dhabi sovereign fund said on Monday Malaysia’s troubled state fund 1Malaysia Development Berhad (1MDB) was in default of its obligations on $1.1 billion in debt and interest.

The International Petroleum Investment Company (IPIC) said in a filing to the London stock exchange, where it is listed, that it was now considering all its options to remedy the default. That included referring the matter to the appropriate dispute resolution forum, the IPIC statement said.

The Abu Dhabi fund said it was terminating last June’s agreement, under which it agreed to provide $1 billion in cash as well as assume payments on $3.5 billion of 1MDB debt. It also forgave an undisclosed amount of debt that 1MDB owed to IPIC, in exchange for assets which have not been named.

The Abu Dhabi fund said 1MDB and Malaysia’s finance ministry - which owns 1MDB - are in default on the terms of this agreement.

The development came after IPIC’s denial last week that it owned a British Virgin Islands company, Aabar Investments PJS Ltd, which received payments of $3.5 billion from 1MDB meant for the Abu Dhabi fund.

Malaysia’s Ministry of Finance (MOF) said it would honor all its commitments in financial markets.

“The MOF wishes to make clear that it will continue to honor all of its outstanding commitments in the financial markets,” the ministry said in a statement late on Monday.

The assurance followed a statement by 1MDB that Abu Dhabi had agreed to assume its interest payments on a $1.75-billion bond, but one such payment, due on Monday, had not been paid because of the dispute between the two.

“1MDB wishes to make clear that it and its group entities will meet all of their other obligations under any other financing arrangements and have ample liquidity to do so,” it said in a statement.

The Malaysian fund did not say whether it would make the interest payment due on Monday.

In an earlier statement, 1MDB said it had repaid all its bank debt and short-term obligations, and had a cash surplus of about 2.3 billion ringgit ($585.2 million).

Over the past four weeks, 1MDB has made debt principal repayments of about 7.25 billion ringgit, it said.

Monday’s announcements throw into doubt 1MDB’s efforts to rationalize its debt, said Christian de Guzman, a credit analyst at Moody’s Investors Service in Singapore, which rates the $1.75 billion 1MDB-linked energy bonds.

“We’re still trying to figure out what it means for IPIC, because IPIC has guaranteed these bonds and as far as we understand these (guarantees) were irrevocable.”

PM’s brother takes leave

Malaysian Prime Minister Najib Razak has been under pressure from critics at home after reports claimed that $681 million deposited into his personal bank account just before a 2013 general election originated from 1MDB.

Saudi Arabia’s foreign minister said last week the money from an unspecified Saudi source was a “genuine donation” with no obligations attached.

The prime minister’s brother, Nazir Razak, announced on Monday that he was taking a voluntary leave of absence from his role as chairman of CIMB Group Holdings Bhd, amid an independent review into money transfers into his personal account.

Nazir was dragged into the scandal around political funding and alleged misuse of money from 1MDB after the Wall Street Journal reported last month he received $7 million in funds from his elder brother, Prime Minister Najib Razak, before the 2013 elections.

“Nothing I did was illegal or compromised my position at CIMB, but given the media attention, I understand that it makes the stakeholders uncomfortable,” Nazir told a news conference after the bank’s annual general meeting.

Nazir, a leading Malaysian corporate figure, had said earlier he believed the money came from legitimate fund-raising. He said that CIMB staff disbursed the funds to ruling-party politicians on the instructions of his brother Najib.

Transactions involving 1MDB, which had a debt of more than $11 billion, are being investigated in several countries, including the United States, Switzerland and Singapore.

Najib has denied any wrongdoing, saying he had not accepted money from any state entity for personal gain.

A government-appointed attorney-general this year cleared Najib of any criminal offense or corruption, saying the funds were a political donation from the royal family of Saudi Arabia.

Such donations are not considered illegal in Malaysia.