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Thread: Finance: IMDB, a potential time bomb in the making

   
   
       
  1. #11
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    Oct 2008
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    Evolving into Malaysia's version of a financial nuclear bomb.

    APRIL 23, 2014 3:00 PM


    1MDB: A disaster unfolding before our very eyes

    Many a talk has this and other Tigers had about that so-called strategic fund of ours, yes, 1Malaysia Development Berhad (1MDB). But the snowball just gets larger and larger as it barrels down the hill completely out of control. And no one seems to care.


    Tiger warned that when accounts are delayed, it means dire things. And it was not far wrong. While the picture painted was one of a fund which continued to make profits, they were as illusory as El Dorado and arose purely because of unjustified revaluation of investment property.


    But the signs are ominous — of a problem much bigger than unearned profits and of a situation which is rapidly spiralling out of control and may eventually see much bigger losses in the offing.


    According to the delayed annual report, the land held for the Bandar Malaysia and Tun Abdul Razak Exchange or TRX projects were classified as investment properties in accordance to the Malaysian Financial Reporting Standards (MFRS) which 1MDB adopted for FY13 in lieu of the previous Financial Reporting Standards (FRS).The classification was made because the blueprints for both developments had not been finalised.


    The new standards stipulate that fair value gains from investment properties are to be recognised in profit and loss, implying that the RM2.73 billion in revaluation gains were only recognised in 1MDB’s profit and loss statement because the fund had not finalised the blueprints for both projects.


    Imagine that, the revaluation gain would not have arisen if the blueprints had been finalised. And 1MDB was going to eventually finalise them anyway but found it convenient and expedient to classify it as investment property meantime, pushing the envelope in a very wrong way.


    Let Tiger repeat: the only reason 1MDB is making profits for the last three years is because of consecutive property revaluations. It merely obtained property at giveaway prices from the government and then revalued them.


    Essentially, 1MDB is not operationally profitable, the accounts show beyond a shadow of a doubt. But much more concerning is the amount of money that 1MDB is playing with. Already assets are reaching RM45 billion and of these liquid assets amount to more than half that at over RM23 billion. Liabilities, including borrowings of RM36 billion amount to some RM42 billion.


    Of the over RM23 billion in liquid assets over RM7 billion are invested in Cayman Islands. The 1MDB board says it has no control over these RM7 billion funds and is now looking to sell it.
    Imagine that. 1MDB has put money in investments it can’t control!

    The question that goes a-begging is why there is a need for 1MDB to borrow over RM36 billion and then put a substantial portion of RM23 billion in liquid assets. Even if its acquisitions are alright — they are not — the loan amount necessary is RM13 billion (36 – 23) but instead it is RM36 billion. Why?

    On top of that 1MDB has a history of mispricing its loans and has already lost RM4 billion through this with at least a further loss of RM1 billion following other loans obtained later. Is that the reason for pursuing with the loans and then finding assets to buy after the fact?

    Any prudent strategic fund worth its salt will make a careful assessment of assets it wants to acquire, make a decision, then come up with financing. But 1MDB has got it backwards — get the loans first and then find the assets. Do you take a housing loan first and then look for a proper house to buy? Obviously not but 1MDB does it.

    Meantime, 1MDB pays expensive rates for its loans even if most of them are guaranteed by the government and then puts the excess money in assets such as deposits and dubious investments in the Cayman Islands with lesser returns.

    Some RM23 billion are in near-cash investments, nearly two-thirds of total loans. How dumb, how incompetent or how sinister! Take your pick. 1MDB’s liquidity management is in total shambles.

    So far, the only assets it has bought which could contribute to future earnings quickly are the power assets but these would still not be enough to cover huge financing costs of over RM1.6 billion from its massive loans.

    But the immediate impact of the power assets has been negative with IMDB reporting an impairment loss of RM1.2 billion directly as a result of acquiring the power assets for some RM10.9 billion. That loss is more than 10% of the purchase price and comes less than a year after the acquisitions.

    Despite, this, 1MDB had the gall to say that the power acquisitions enabled it to make a successful bid for project 3B, the 2,000MW coal-fired plant contract that it won and will build for RM11 billion.


    What kind of strategy is that? Overpay for power assets to get the expertise to bid for the power project? It could have just bought the expertise for a few million ringgit instead of wasting billions.

    The annual accounts for the year ended Mar 31, 2013 involve quite a bit of massaging and the notes involved explanations with 1MDB’s latest auditors Deloitte, the third in its short life, highlighting a long list of critical accounting judgements and estimation uncertainty.


    These include areas such as the Cayman Islands investments, investment properties, arrangements relating to various power purchase agreements including renewals, its fund investments, fair value measurements and valuation processes — in short over substantially all of 1MDB’s businesses.


    1MDB’s delayed annual report for the year ended Mar 31, 2013 is an indictment of the so-called strategic investment fund and all that it has done so far and is clear indication that it could well become the country’s worst single case of misuse of public funds.


    Now if only someone will sit up and take notice.


    GRRR!





    py

  2. #12
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    This has all the elements of racketeering.

    Malaysia’s Investment Fund Disaster

    Written by John Berthelsen
    MON,08 DECEMBER 2014















    A champagne-swilling youth leads the PM into a bog of debt and scandal


    In 2008, a boisterous young man by the name of Jho Low Taek, a Penang-born Wharton grad with a taste for Cristal champagne and Broadway blondes, approached Malaysia’s Terengganu state government with a proposal to use the state’s authority to sell RM10 billion (US$2.87 billion) in bonds to start a state-backed investment fund.

    That proposal has led to what Tony Pua, a Democratic Action Party lawmaker, has called “the mother of the mother of the mother of all scandals in the history of Malaysia.”

    That might be one mother too many, but Pua is not alone, with critics of what is now called 1Malaysia Development Berhad, or 1MDB, coming from outside the opposition as well. It is certain that the proposed Terengganu Investment Authority has metastasized into a mess that can properly be called huge and has put Prime Minister Najib Tun Razak’s tattered reputation on the line yet again. Much of the story has been detailed in two Malaysian publications, The Edge and the online news portal Malaysiakini's business unit, Kinibiz.

    Najib, the head of the 1MDB advisory board, has faced a barrage of questions from opposition lawmakers in Parliament for weeks and an attack on his own flank from former Prime Minister Mahathir Mohamad and his allies, including former Finance Minister Daim Zainuddin, over what can only be regarded as an astonishing level of mismanagement.

    The question was why Malaysia needed another government-backed investment fund in the first place, especially one dreamed up by a young friend of the PM's family. It has Khazanah Nasional Bhd., the 23-year-old investment holding arm that manages Malaysia’s assets and makes strategic investments, and the Employee Provident Fund, which also invests employee pension funds. Both are creatures of the Ministry of Finance.

    The Terengganu Sultan, Mizan Zainal Abidin, had misgivings over the plan by Jho Low, as he calls himself, so the 27-year-old Low went to the parents of a friend he had made among Malaysia’s privileged elite in the UK. While anti-colonial rhetoric still spews at home, Malaysia’s wealthy have always known where to send their scions. Jho Low was at the exclusive 450-year-old Harrow, with his friend Riza Aziz at nearby 150-year-old Haileybury, which trained English youth for service in India. Riza’s mother is Rosmah Mansor, Najib’s second wife.

    Thus the proposed Terengganu Investment Authority metamorphosed into 1Malaysia Development Bhd., also under the Ministry of Finance. Today 1MDB has accumulated debt of RM36.25 billion (US$10.4 billion) that is only covered by repeated accounting upgrading of the value of property handed to it at a knock-down price by the government to get it started – a 196-hectare former air force base near the center of Kuala Lumpur.

    In recent months, the government, in an attempt to build up the fund so it can be listed, has strong-armed at least three no-bid contracts for 1MDB to build coal-fired and solar power plants. One of those power plants, in Port Dickson near Malacca, was awarded to 1MDB despite a lower bid from a joint venture of YTL International Bhd and SIPP, partly owned by the Sultan of Johor, who is said to have been enraged by the loss and is demanding privately that SIPP be given its own no-bid contract for another plant.

    Although its dealings are opaque, sources in Kuala Lumpur believe it was Jho Low, previously regarded as a savvy investor despite his tender years, who drove 1MDB into disaster. Although the chairman of the Board of Directors is Lodin Wok Kamaruddin, who holds the high-ranking honorific of tan sri, he is regarded as a figurehead and many of 1MDB’s major decisions have Low’s fingerprints on them

    Low, who has accompanied Rosmah on forays to New York to meet celebrities including Lionel Ritchie and Paris Hilton, landing in the pages of the New York Post, involved 1MDB in backing his failed 2011 bid to buy three prestigious London hotels – Claridge’s, the Connaught and The Berkeley, according to documents filed in the Chancery Division of the UK’s Royal Courts of Justice.

    A Los Angeles law firm accused the government of Malaysia, without mentioning 1MDB, of racketeering in funding the phenomenally successful movie The Wolf of Wall Street, an Oscar-nominated picture starring Leonardo DeCaprio and co-produced by Riza Aziz, Rosmah’s son. How that might have been done is unclear. The lawyers for a Los Angeles plaintiff who sued over the rights to the movie refused to elaborate, citing lawyer-client privilege. But in the case of the Claridge’s campaign, 1MDB issued guarantee letters saying the fund would stand behind the purchase. Presumably that meant Malaysia’s sovereign fund would cover any losses accrued if the sale failed.

    The fund loaned RM7.2 billion to finance oil exploration for another chum out of that rarefied London ex-colonial society – Tarek Essam Ahmad Obaid, a London playboy said to be a grandson of the Saudi Sheikh Obaid, one of the kingdom’s most senior grandees. Tarek met Jho Low a few months before the deal for the loan was consummated, according to Clare Rewcastle Brown, a former BBC reporter who has followed the 1MDB affair closely. Tarek is the founder and chief executive of PetroSaudi International, Ltd. Despite its pretentious website there is little information on PetroSaudi, which was only incorporated three years before the entry of 1MDB. The money, to be loaned at 8.75 percent, has disappeared.


    What 1MDB has not done is make enough money to cover its huge debt, although determining anything is difficult because no up-to-date accounts have been filed.


    “I was the finance head for oil companies before I entered politics,” Rafizi Ramli, strategic director and secretary-general of the opposition Parti Keadilan Rakyat, told Asia Sentinel. “Nobody I knew had ever come across PetroSaudi before. We tried to check what it was. It was incorporated in the British Virgin Islands. While it is normal for financial investors to enter into ventures, how could a government commit such a huge sum of money with a greenhorn company with no known track record, incorporated in a haven for dodgy money, in an industry where capital risk is so huge?”

    When the bid to explore for oil collapsed, the money appears to have been invested in speculative yen forex deals, insiders told Rafizi. Forex trading is not for amateurs. By early 2012, it began to appear that the money had
    altogether disappeared, according to Tony Pua. 1MDB was having trouble filing its financial reports, a signal that something was wrong. When 1MDB said the funds had been moved into a fund in the Cayman Islands, its managers refused to say who was managing the money.


    Today, Pua said, the entire operation appears to be built on debt, although with audited financial reports delayed it is impossible to say for sure. Its managers are seeking to cover the losses through additional borrowings and money raisings, including a US$4.75 billion one engineered by Goldman Sachs, the international investment bank, that cost 1MDB 10 percent of the offering, a phenomenal amount for “commissions, fees and expenses” according to the prospectus. By comparison, Tenaga Nasional, the state-owned energy utility, paid a 2 percent fee on a US$300 million money raising. SMBC Aviation Capital, which leases jets to Malaysian Airlines, paid 0.5 percent on a US$1 billion capital raising. The fees paid to Goldman worked out at US$1.54 billion, Pua said.


    The fund today is betting its future on becoming the country’s biggest power producer and a global energy player. It acquired a string of overpriced independent power producers from the Genting gambling interests and Ananda Khrishnan, the country’s richest businessman and an UMNO crony, for RM11 billion to generate cash flow, at what were astounding valuations. Indeed, within six months, the fund’s auditors wrote off RM1.2 billion of the valuation because they were so overpriced.

    “Because they were desperate to borrow to cover the acquisitions, they had to pay higher interest rates,” Pua said. “And because they were desperate, they paid Goldman crazy fees to arrange the loans.”


    On top of the enormous interest burden from the debt, it turns out that the cash flow from the IPPs is so small that it was barely enough to cover the interest, let alone pay back the RM15 billion principal.


    With the hole from the initial failed loan to PetroSaudi, and the vast debt from the IPP purchases, 1MDB is now trying to list to raise US$10 billion from the market. But in order to write a credible prospectus for the listing, it requires strong financials. 1MDB’s financials do not come anywhere near credible enough to assure potential investors of future cash flow.


    The government has stepped in to extend the contracts for the IPPs, which were supposed to end after their contract periods ended. That is still not enough. The government then tendered a contract to build the coal-fired plant in Port Dickson. Critics charge the contract was unnecessary, that Tenaga Nasional, the state-owned utility, had the experience and capital to build the plant itself. The tender turned out to be a fiasco, with the YTL-SIPP consortium coming in with a lower bid, only to be disqualified on what many critics have said was a technicality.


    Since then, the government has awarded three contracts to 1MDB, the other two without the potential embarrassment of a tender process. But critics point out that 1MDB has never built anything and is mainly relying on the expertise of Tenaga Nasional. The bid for a 50 megawatt solar power plant project in Kedah in the north of the country is to be the largest solar plant in Malaysia despite the fact there is no guaranteed offtake, that prices for solar, even though they have fallen sharply, still exceed that of conventional plants, and that Malaysians are going to end up paying more for their electricity.


    All of these moves are an attempt to rescue 1MDB and give it the potential to demonstrate income to investors. So on the advice of a 27-year-old neophyte and friend of the prime minister’s family, the country has created a state-backed investment fund, got itself involved in a series of businesses it knew nothing about, put the country’s sovereign backing behind a private hotel bid and a Hollywood movie, run up a vast amount of debt, and now is seeking to bail itself out via preferential contracts to build electrical plants with expertise so far it doesn’t have. The critics expect that this is going to cost Malaysia’s taxpayers and ratepayers a considerable amount of money.

    py

  3. #13
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    The net is closing.


    BRUNO MANSER FUND, BASEL / SWITZERLAND


    20 Swiss banks investigated over 1 MDB, Petrobras scandals, Swiss bank regulator says

    FINMA CEO Mark Branson highlights money-laundering risks with Malaysia deals at annual media conference

    "A number of Swiss banks are involved in both the corruption scandal surrounding Brazil's Petrobras and the suspicious cash flows linked to the Malaysian sovereign fund 1MDB. FINMA has carried out investigations into more than 20 banks in connection with these cases, and has opened seven enforcement proceedings against institutions", Mark Branson, CEO of FINMA, the Swiss bank regulator, said on Thursday at FINMA's annual media conference.

    Branson chose the two cases to highlight that the money-laundering risk is on the increase in Switzerland, with Swiss banks being stronger involved in emerging markets and developing countries. "And we are talking here not about small fry, but what looks like blatant and massive corruption." Branson said that banks needed to do more to combat money laundering.

    Specifically on 1 MDB and Petrobras cases, Branson said: "From what it looks like, we are not dealing here with shades of grey. The evidence points to clear cases of corruption."

    "The extent of the cases and the sums involved are vast. We are talking about cash flows amounting to several billion US dollars, with individual transactions running into hundreds of millions. Those are significant sums of money for developing nations like Malaysia and Brazil, in which the average monthly income is less than USD 1,000."

    Branson also criticized Swiss banks for not reporting enough suspicious transactions to FINMA. "Banks must be readier to file a report as soon as they have concrete suspicions and not wait until the media has taken up the scandal."

    "Money laundering is no victimless crime. It allows criminals to profit from breaking the law. It also facilitiates corruption and the absue of power and privilege. Corruption and tax fraud are the natural enemies of progress, especially in developing countries."

    The Bruno Manser Fund calls on FINMA and Swiss prosecutors to severely sanction Swiss banks that have accepted proceeds of corruption from Malaysia and Brazil.


    Source:

    https://www.finma.ch/de/news/2016/04...7-mm-jmk-2016/
    py

  4. #14
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    1mdb is a huge mess.. now we have to pay the price for it

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