Malaysia’s 1MDB risks default as UAE partner ends bond support

Malaysia’s state investment company, already a target of global investigations into allegations of money laundering and embezzlement, has another major problem: it now faces the risk of sinking into default.

1Malaysia Development Bhd 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. That means 1MDB and Malaysia’s finance ministry “are in default”, Abu Dhabi’s International Petroleum Investment Company (IPIC) said.

The development leaves 1MDB’s bondholders waiting for an interest payment, due on Monday, that may never come. The Abu Dhabi fund indicated it no longer has an obligation to make the interest payments, and 1MDB didn’t say if it would step in. Malaysia’s finance ministry said in a statement that it “will continue to honour all of its outstanding commitments”.

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Failure for either side to fulfil the debt obligation could result in 1MDB’s first default since its inception in 2009. It would also come at a time when authorities from the US to Switzerland are trying to determine if some of the billions of dollars that 1MDB raised to buy energy assets were siphoned out inappropriately. 1MDB, whose advisory board is chaired by Prime Minister Najib Razak, has consistently denied any wrongdoing.

IPIC entered an agreement with 1MDB in May 2015 where it would provide the Malaysian fund US$1 billion to settle some liabilities in exchange for a transfer of assets, as well as assume interest obligations on US$3.5 billion of debt. 1MDB and its shareholder, Malaysia’s finance ministry (MOF), “are in default” on the terms of the binding term sheet with IPIC and its unit, the Abu Dhabi fund said, adding that it has met all its obligations to date.

“1MDB and MOF continue to be bound by their respective obligations under the terms of the Binding Term Sheet,” IPIC said on Monday. That includes indemnifying IPIC and its unit Aabar Investments PJS for any claims against it over guarantees it gave for bonds issued by 1MDB, it said.

1MDB amassed more than 50 billion ringgit (US$12.7 billion) of debt over six years, using some of it to buy energy assets, including joint ventures with companies in Saudi Arabia and Abu Dhabi. 1MDB said in a separate statement on Monday it has repaid all short term and bank borrowings, and has a 2.3 billion ringgit surplus.

“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.