Rationalisation or monetisation, more to 1MDB’s Edra sale than meets the eye

Call it rationalisation or monetisation, the fact remains that no one doubts that the sale of Edra Global Energy Berhad to a Chinese consortium, led by China General Nuclear Power Corp (CGN), was meant to cut 1Malaysia Development Berhad's (1MDB) heavy debt burden. Bloomberg alluded that 1MDB is getting ready to wind down its operations.

Granted, in many instances the 1MDB's debt burden were evidently self-inflicted. Paying for assets hugely in excess of market prices and finally getting into a situation where so-called "strategic assets" are incapable of generating revenues and cash-flow to service for its debt, does not speak very well of "a strategic investment fund" of the government.

So what is so "strategic" about the purchases of the power assets in the first place from either local players and others, spanning five countries. 1MDB wanted to earlier consolidate them all and be a long-term player in the energy sector and to enhance shareholders value. Many doubted that they have achieved any of these corporate targets.

Selling it all as a "distressed sale" of 100% of its ownership in energy assets to a foreign party, after a failed IPO, smacks of sinister motives. Waiving the 49% limit on foreign ownership of strategic asset underscores it all. The failed IPO of Edra did not speak well of its financial state.

So the foreigner was ostensibly willing to pay 20% more than our Tenaga Nasional Berhad. Tenaga was however dead sure of not wanting to pay for anything more than what it is worth. An analyst at Hong Leong Investment quipped that Tenaga does not want to be accused of bailing out 1MDB, hence was not willing to contest CGN's offer. Whether this sale has far-reaching consequences on the issue of "energy sovereignity" of the nation is now open to debate.

But all the more puzzling is why CGN was willing to do it. We shall address that issue later. 1MDB group president Arul Kanda Kandasamy was visibly very elated as he is reported to have said that the sale is "a significant foreign direct investment committment to Malaysia and a clear vote of confidence in the Malaysian economy".

After all that has happened to 1MDB, Arul does not have to be overly condescending. Some may fall off their chairs, amused and others bemused.

Let us look at some ballpark numbers cursorily.

1MDB purchased the Edra assets totalling RM12 billion, and as well inherited a debt of RM6 billion. Now 1MDB sells it to China (China General Nuclear Power Corp, CGN Group) for RM9.83 billion and it also assumes the RM6 billion debt and cash (if any). Does that mean that 1MDB made a loss of RM2.17 billion?

Retrospectively, few can now recall that 1MDB actually raised a borrowing of RM17.55 billion to acquire the power assets worth RM10.85 billion. In other words, 1MDB has incurred a cost of raising the funding close to RM6.9 billion! But why do that? Let us recap....

Goldman Sach was paid a hefty fee of US$393 million or RM1.3 billion for raising the two bonds totalling US$3.5 billion or RM11.55 billion. Meanwhile RM4.25 billion was paid to International Petroleum Investment Company (Ipic), Abu Dhabi as a "security deposit" for acting as a "co-guarantor" for this bond

This was 37% of the bonds raised. Outrageous! Most ironically, 1MDB is a "sovereign entity" that is 100% owned by the Finance Ministry. Why 1MDB has to do the "toxic borrowing strategy" and pay astronomical fees is baffling to this date, to say the least.

Meanwhile 1MDB added to its debt burden by taking a "bridging loan" of RM6.2 billion from a consortium of banks led by Maybank Berhad and RHB Berhad for the purchase of their power assets.

Given the huge cost of borrowing, how could one ever talk of making any profit on the sale of these power assets anymore.

Little wonder why it is so compelling to believe in the narrations bandied around on social media that some "kickbacks" landed back, to be exact RM2.6 billion, into the chairman of 1MDB Advisory Board's personal account as a "donation". That allegation needed to be proven wrong and "seditious" urgently.

But this writer has also been asked this question. Could it really be that this a clever accounting method of "writing-off" the difference between purchase and resale (albeit distressed) as "investment losses"? Thus cleaning up IMDB's books?

It may be that Arul Kanda would have to explain this, but would it not be the case that the original perpetrators, some say, "could have gotten away with this 'sin'?"

Last, but not least – and I surely would have to be presumptuous at this – but I wish to ask whether the CGN Group were promised any future nuclear project as a "quid pro quo" for "salvaging" aka bailing out 1MDB?

I rest my case. – November 25, 2015.

* This is the personal opinion of the writer, organisation or publication and does not necessarily represent the views of The Malaysian Insider.