Sunday, May 1, 2016


In my previous post I had ascertained that it was 1MDB which was solely responsible for the payment of the interest due as issuers of the USD1.75 billion bond and in failing to do so was deemed to have defaulted.

Before proceeding we need to recall IPIC had issued a statement to the London Stock exchange on 11 April 2016 in a matter relating to an entity, AABAR BVI, in which IPIC had stated is not an entity related in any way to the IPIC group of companies.

Forget about the reactions by 1MDB or media reports in response to that statement. In my humble opinion it was nothing more than a panic reaction to a shocking revelation.

A wake up call.

I can safely say the 11 April statement by IPIC has nothing to do whatsoever about the issue at hand i.e. 1MDB defaulting and the more trying issues ahead for the government backed vehicle as a result of this default.

To better understand the present predicament facing 1MDB we need to look at the chronology, by way of IPIC's statements filed to the London Stock Exchange, up till now.

10 June 2015 RNS Number : 7064P 1MDB Debt Settlement Arrangements

This was the start that has turned into a contentious relationship wherein a particular document is mentioned and is at the heart of the disagreement between IPIC and 1MDB a "binding term sheet"

The relevant points of the agreement:

  •  IPIC had disbursed to 1MDB a sum of USD 1 billion.
  •  IPIC will assume all interest payments in relation to 2 bonds with a principal sum totalling USD3.5 billion. 
However, it is clearly states in parenthesis "on an interim basis". Please keep this in mind because it explains why IPIC and not 1MDB had made 2 interest payments in October and November of 2015.

  • IPIC would directly assume liability for all payment obligations under the Notes (the Assumption of Debt) and forgive certain financial obligations of the 1MDB Group to the IPIC Group (the Debt Forgiveness) upon the completion of the transfer of assets.
This meant that IPIC would take full responsibility for interest payments in contrast as a guarantor making  payment when the issuer, 1MDB, is deemed to have defaulted.

Again however, this is subject  to and "upon the completion of the transfer of assets". I am making an assumption that these assets must have the value of the sum of the total interest payments due until the bonds mature. It will not make common or business sense otherwise.

The last and final point:

  • IPIC is to have received a transfer of assets with an aggregate value of an amount which represents the sum of the Cash Payment, the Assumption of Debt and the Debt Forgiveness by 30 June 2016.

Within the context of the agreement, IPIC would only assume a role that of a primary obligor and not as guarantor only "upon the completion of the transfer of assets" and by the 30 June 2016.

The total value of the assets to be transferred, in a previous post have proven to be accurate in this official 1MDB statement dated  26 April 2016, "...a binding term sheet executed on 28 May 2015 (“Binding Term Sheet”), under which IPIC assumed the obligation to pay the interest and ultimately the principal for, amongst others.."

18 April 2016 RNS Number : 4672V 1MDB Debt Settlement Arrangements

This statement was issued on the very day that the interest was due on the 1MDB Energy (Langat) Limited USD1,75 billion bond tranche and was greeted by incredulity on the part of 1MDB not only to this statement but also to the unrelated Aabar BVI statement of 11 April.

To know more why it is unrelated, one need to understand that much have been reported by the media including stylised graphics of 1MDB payments made to Aabar. But if 1MDB took the trouble to peruse IPIC's annual reports from 2012, 2013, 2014 up to the latest 2015 (unaudited), nowhere in these reports are stated any payments from 1MDB to Aabar in the accounts and Notes. In fact, there were media reports that IPIC had been looking into these mystery payments claimed to have been by made 1MDB. CNBC had this report dated 9 September 2015.

It in this statement that the all important "binding term sheet" is given more prominence with a heading of its own, Status of the Binding Term Sheet together with the main heading 1MDB Debt Settlement Arrangements.

This 1MDB Debt Settlement Arrangements filing underlines the following:

  • IPIC extending financial support to 1MDB at he request of 1MDB and MOF
  • 1MDB and MOF acknowledging liabilities owed to IPIC
  • Conditional settlement, release and discharge of certain obligations and liabilities between the IPIC, 1MDB and the MOF 

The Status of the Binding Term Sheet detailed these matters:

  • IPIC had fulfilled its obligations. 1MDB and the MOF had failed to make certain payment and other obligations including a specific sum of USD 1,102,725,000 plus interest accruing

As mentioned earlier, IPIC had made interest payments in October and November of 2015. This is disclosed in the IPIC (unaudited) 2015 financial report. Interests on two tranches of bonds totalling USD 3.5 billion are paid semiannually at 5.75% and 5.99% coupons issued by 1MDB Energy (Langat) Limited and 1MDB Energy Limited respectively.

Interests 5.75% of USD 1.75 billion semiannually is USD 50,312,500 and at 5,99% is USD 52,412,500 totals USD 102,725,000 and this amount added to the USD 1 billion, disbursed by IPIC to 1MDB in June 2015, gives a grand total of USD 1,102,725,000. This grand total (plus interest accruing), the sum that 1MDB failed to pay IPIC specifically stated in the statement filed, as it turned out to be was supposed to have been paid by 1MDB on 31 December 2015 and admitted by the 1MDB CEO, Arul Kanda,  in the greeted incredulity link above.
  • 1MDB and MOF in breach of Binding Term Sheet. IPIC and Aabar duly terminates Binding Term Sheet 
  • 1MDB and MOF still bound by obligations of Binding Term Sheet including indemnity to IPIC for non performance and any claims against IPIC in relation to bond guarantees by IPIC.
  • IPIC had engaged and given 1MDB and MOF opportunities to remedy defaults without success. IPIC reserves rights and considering options including referring matter to appropriate resolution forum.
The October and November semiannually interests payments by IPIC is in compliance with the 28 May 2015 Debt Settlement Agreement, made on interim basis.

This filing to the London Stock Exchange has an ominous tone of legal repercussions and showed a definite strained relationship between 1MDB and it's once most important business partner.

There is no mention of the interest payment due the same day 18 April but it drew an immediate response from 1MDB which understood the IPIC statement to mean that it would not make the interest payment.

Arul Kanda was also reported by Reuters to have said that the default in question would incur cross defaults on IPIC as well as 1MDB.

25 April 2016 RNS Number : 1844W Upcoming Interest Payments under certain 1MDB Notes

And so it was to be and rightly so but not in the way Arul Kanda had been quoted.

I append the statement verbatim for better comprehension of IPIC's contention in matters relating to the Debt Settlement Arrangements and interest default:
  • IPIC will make the U.S.$ 50,312,500.00 interest payment to holders of the Notes issued by 1MDB Energy (Langat) Limited and guaranteed by 1MDB, but only after 1MDB defaults on its payment obligations in respect of such Notes
  • A 1MDB default does not cross-default IPIC
On 10 June 2015, IPIC GMTN Limited issued an announcement (RNS Number 7064P) relating to a binding term sheet dated 28 May 2015 (the Binding Term Sheet) and other ancillary documents entered into between International Petroleum Investment Company PJSC (IPIC), Aabar Investments PJS (Aabar), Minister of Finance, Inc., Malaysia (MoF) and 1Malaysia Development Berhad (1MDB). Amongst other things, the Binding Term Sheet provided for IPIC assuming the obligations to pay (on an interim basis) interest due under two IPIC guaranteed 1MDB financings amounting to U.S.$3.5 billion in aggregate principal amount, including U.S.$1,750,000,000 fixed rate 5.75 per cent. notes due 2022 issued by 1MDB Energy (Langat) Limited and guaranteed by 1MDB (the Notes).

IPIC's guarantee of the Notes (the Guarantee) provides that IPIC's payment obligations in respect of the Notes are subject to certain conditions, including the occurrence of a 1MDB Event. 1MDB Events, in turn, include a default by 1MDB for more than five business days in the payment on the due date of interest or principal payable in respect of the Notes (1MDB Default). The Guarantee also prescribes the number of days following such 1MDB Default within which IPIC must fulfil its payment obligations in respect of the Notes. A 1MDB Default does not cross-default IPIC.

In respect of the Notes, IPIC notes that an interest payment of U.S$ 50,312,500.00 was due on 18 April 2016. IPIC understands that neither 1MDB Energy (Langat) Limited nor 1MDB have made this payment. Should 1MDB Energy (Langat) Limited and 1MDB fail to make such payment on or before 25 April 2016, a 1MDB Default shall occur.

As at the time of this announcement, IPIC is not aware of the Guarantee being called upon. IPIC has always honoured its obligations arising from any agreements it has entered in to and will continue to do so. Accordingly, if a 1MDB Default occurs and IPIC is called upon in accordance with the procedure prescribed in the Guarantee, IPIC will honour its obligations in relation to this interest payment, which shall be met out of IPIC's existing liquidity.

IPIC notes that the status of the Binding Term Sheet continues to be as disclosed in the announcement issued by IPIC GMTN Limited on 18 April 2016 (RNS Number 4672V). 1MDB and MoF are in default pursuant to the terms of the Binding Term Sheet and IPIC's and Aabar's obligations under the Binding Term Sheet have terminated. Any payment in respect of the Notes would be made by IPIC in respect of its obligations under the Guarantee and not in any capacity under the terms of the Binding Term Sheet. IPIC notes that it is entitled to the benefit of indemnities from 1MDB and MoF in respect of all amounts that it may be required to pay in respect of the Notes and the Guarantee under the terms of the Binding Term Sheet and these indemnities survive the termination of the Binding Term Sheet.
IPIC reserves all its rights under the above documents and in respect of the various options for settlement.

It is clear that matters had escalated with distinct conflicting interpretation, from what had been reported and disclosed in this statement filed, of the Binding Term Sheet and clarifying guarantee matters in relation to the two 1MDB bond tranches issued.

This filing is more detailed explaining IPIC's position and the two main points are that IPIC will honour its obligation on the payment interest but only after 1MDB has defaulted and repudiates Arul Kanda's assertion that a 1MDB default would cause a cross default of IPIC's bonds.

IPIC states under the two bond USD 1.75 billion issue Notes, it's guarantee is conditional subject to an event such as 1MDB defaulting.

The filing goes on to state that henceforth IPIC would honour all its obligations only under the Notes of the bond issues and not the Binding Term Sheet which IPIC contends it's obligations had ceased as it had been terminated due to breaches by 1MDB and MOF.

As in it's previous statement, the language is legalistic even specifically stating it is entitled it indemnities from 1MDB and MOF, in both the bond issue guarantee Notes and Binding Term Sheet. It also reiterates reserving it's rights in options for settlement.

29 April 2016 RNS Number : 8054W Scheduled Interest Payment under certain 1MDB Note

In honouring its obligation as guarantor, explained in detail in their previous filing, IPIC had this filing confirming payment of the interest after 1MDB had been deemed to have defaulted.

Salient points:

  • IPIC confirming the interest had been paid after 1MDB default.
  • Written demand for indemnity from 1MDB and MOF as per the Binding term Sheet
This filing is even more legalistic in nature as it explicitly states that a written demand would be made to 1MDB and MOF for indemnity.

The filing has reference to all the statements I have appended and commented. It supports my view that the Aabar BVI 11 April filing has nothing to do in the present dispute as far as IPIC is concerned.

As the dispute progressed, it looked increasingly possible that IPIC or 1MDB, would have to seek redress by way of a legal recourse. 

This is especially so on the part of IPIC.

It it happens to come to pass, taking even the barest minimum USD 1,102,725,000 plus the current bond interest paid, will now stand at USD 1,153,037,500 is substantial.

1MDB surplus funds of RM 2.3 billion or USD 587,184.000 (RM 3.917 = USD 1) would be pale in comparison to USD 1,153,037,500 the sum IPIC would be seeking in a written demand. 

Addressing the Aabar BVI disputed payments and for good measure, this document downloaded from this link (or from Bondsupermart and key in '1MDB' in the bond quick search window), is the offering circular by 1MDB Global Investments for a USD 3 billion bond issue.

In it is reference to a joint venture company Abu Dhabi Malaysia Investment Company Limited or ADMIC,
The net proceeds of the issue of the Notes will be approximately U.S.$2,716,760,000 after deducting certain commissions, fees and expenses. See “Distribution Plan, Activities of Goldman Sachs and Selling Restrictions”. The Issuer will either on-lend all of the net proceeds of this Offering to ADMIC or use the net proceeds of the offering to fund its investment in ADMIC, which will be a 50:50 joint venture between the Issuer and Aabar. See "The Joint Venture".
The above bond issue is reported in a press release by 1MDB. 

However, ADMIC is not mentioned anywhere in IPIC's 2013 annual report even though in the 1MDB 2013 Annual report,  Note 45 Significant Events Subsequent to The End of the Reporting Period (i) (h),  Aabar Investments PJS became a 50% shareholder of ADMIC

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