November 19, 2014
Chairman Lodin, come clean on 1MDB, figures don’t lie
by Kharie Hishyam @www.kinibiz.com
Like a toddler learning to walk, controversial state investment fund 1Malaysia Development Bhd is slowly coming out to refute its critics. But proper explanations are yet to come and its latest public statement only spawns more questions.
Amid the burning fire of controversy over its questionable dealings, state investment fund 1Malaysia Development Bhd (1MDB) has come out and “assured” Malaysians that its investments were carefully made and professionally managed. Alas, the same characteristic of being professionally managed can also probably be said about many of the 23 public-listed companies in Bursa Malaysia’s PN17 list. But what’s in labels anyway?
In the corporate world results, not reputation, is what delivers and one wonders why 1MDB, with all the professionalism within its managerial ranks, has bled losses year after year with only paper gains papering over the red ink.
So what had 1MDB so prudently invested in? According to its audited accounts, 1MDB invested a total of RM13.4 billion for the financial year ended March 2014 (FY14) in various places globally. This figure includes the RM7.7 billion parked in a structured investment company called a Segregated Portfolio Company (SPC) based in the Cayman Islands, managed by Hong Kong-based Bridge Partners.
And for these investments, 1MDB gained dividend income of RM437 million, which represents a paltry return of 3.26% on its investments. Considering the point that 1MDB could have parked the money in fixed deposit or government bonds and still get similar return — with an added bonus of less foreign exchange risk — it begs the question of why 1MDB bothered to go overseas in the first place.
Of course there is an even uglier side to the investment story: 1MDB’s audited accounts reveal that the investment fund is earning a mere 0.68% interest on its cash pile of nearly RM4 billion.
On the other side of the coin is that 1MDB’s finance costs or interest rates range from roughly 5% up to as high as 18% per annum.In effect, 1MDB is earning much less with its money compared to how much it is paying to have that money in its coffers. Worse, a big chunk of its money is left idle after paying so much to borrow the money in the first place, earning next to nothing in interest.
Why? Simple logic dictates that to make profit, capital must be put to work such that it earns more money than it costs to acquire the capital in the first place. That’s how you earn profit.
1MDBLeaving the capital idle definitely does not qualify as “investing”, unless having idle cash qualifies as investment (a poor one if you have loan repayments to meet). Why incur borrowing costs for nothing?
No wonder 1MDB is finding it difficult to service its loan commitments. Speaking of which Lodin stated that the investment fund believes it can meet its financial commitments.
“Some of the loans are long-term in nature but we believe this financial commitment can be met,” Lodin was reported as saying by Bernama, adding that 1MDB is looking to restructure its short-term loans to match its longer-term investments. “We are also in the process of adding and unlocking value to the assets that we have acquired.”
Recall that 1MDB already extended its RM5.5 billion bridging loan, originally part of a RM6.2 billion loan from Maybank Investment Bank in 2012, multiple times, even delaying its power assets listing due to negotiations on its debt obligations.
Now this begs yet another question: why borrow on such short horizons if the capital is intended for long-term investments? Would it not make more sense to match the repayment timeline with when the returns on investment are expected to flow in?
And unlocking value to the assets 1MDB had acquired, of course, would not be too difficult. Its properties were acquired cheap from the government, after all, and from there it is simply a matter of bringing valuations up to market benchmarks.
As for its power assets, KiniBiz had previously examined why 1MDB grossly overpaid for them, even borrowing money to do so despite having much cash lying around. Now is this prudent investing as 1MDB Chairman Lodin so generously claimed? Hardly. Numbers don’t lie and in 1MDB’s case, red ink remains red however you call it otherwise.
Perhaps 1MDB is revolutionising investment before our very eyes. Maybe there is a deeper wisdom to its strange madness of borrowing at high cost and making low-return investments.
Or maybe, just maybe, 1MDB simply made poor investment choices and consequently lost some RM5 billion over the past few financial years bar paper gains from revaluing its properties.
In which case what 1MDB seems to be saying right now fits right into the first part of the Kübler-Ross’ five stages of grief: denial. And we have not even talked about its losses of up to RM4 billion from its bond mispricing yet…