Malaysia’s 1MDB bonds rally as fund row stokes volatility

Malaysia Development Bhd’s bonds maturing in March 2023 rose, halting a three-day slide on concern the state investment company may default on its debt obligations after a spat with Abu Dhabi’s sovereign wealth fund. (Businesstimes.com.sg)

The US$3 billion 4.4 per cent notes jumped 4.3 cents to 84.3 cents on the dollar to yield 7.36 per cent as of 1:50 pm in Hong Kong, according to Bloomberg-compiled prices. The securities slumped 12.4 cents on April 18, the most since at least April 2014. The company’s US$1.75 billion of 5.99 per cent notes due May 2022 fell 3.9 cents to 102 cents Monday.

1MDB failed to make a payment of more than US$1 billion in connection with a loan made last year by Abu Dhabi’s sovereign wealth fund, according to a London stock exchange filing Monday from a unit of Abu Dhabi’s International Petroleum Investment Co. The loan refers to a “binding term sheet”in which IPIC assumed obligations to pay all interests on US$3.5 billion of 1MDB debt obligations in exchange for some payments in cash and assets. The failure to make the payment means 1MDB and Malaysia’s finance ministry “are in default,” IPIC said in its April 18 filing, creating confusion on who will pay the next coupon on the May 2022 notes.

“There’s just too much volatility in these bonds,” said Kim Jinha, head of global fixed income in Seoul at Mirae Asset Global Investments, who has tracked the company since 2013 and doesn’t own the notes. “These bonds are for opportunistic trading, at best.” Kuala Lumpur-based 1MDB, which is owned by the finance ministry, is in an “extremely liquid position,” President Arul Kanda said in a Bloomberg TV interview. The company is “in direct contact with IPIC and we are seeking to work through these differences to come to a resolution,” he said.

“The disputed bond does not carry a Malaysia sovereign guarantee so there are no rating implications on Malaysia for now,” said Yee Farn Phua, the primary analyst for Malaysia at Standard & Poor’s in Singapore. “The bond is not in default yet” as the interest payment is still within a grace period, after which the trustees can call on the guarantee, S&P said.

The loan dispute between 1MDB and the Abu Dhabi fund puts in doubt the progress of the Malaysian state investment company’s debt restructuring efforts, according to Moody’s Investors Service. “The only thing certain at this point would be that this dispute and the possible termination of the debt-asset swap places the progress of 1MDB’s debt rationalization plan in doubt,” Christian de Guzman, a Singapore-based senior analyst at Moody’s, said by e-mail in response to questions from Bloomberg.

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