by Ganesh Sahathevan
Bloomberg's Loan and Private Credit Editor Chien Mi Wong offered an opinion, publsihed by then employer Asiamoney, on the infamous Goldman-1MDB deal where she said, amongst other things:
As Malaysia gears up for its election on May 5, opposition politicians are trying to hurt the government by criticising private placement issued by 1Malaysia Development Berhad (1MDB,) but are only really succeeding in showing how little they understand about the way financial markets work.
At a time when financial markets in the Asian region are looking to boost their debt capital profiles globally, Malaysia must realise that such scaremongering is unproductive and uncalled for.
Politics can be a dirty business and politicians will jump on to any bandwagon in an effort to discredit their rivals. As Malaysia gears up for its election on May 5, opposition politicians are trying to hurt the government by criticising private placement issued by 1Malaysia Development Berhad (1MDB,) but are only really succeeding in showing how little they understand about the way financial markets work.
Sovereign wealth fund, 1MDB, issued a US$3 billion 10-year private placement on March 19 and local Malaysian press has had a field day with the flurry of negative talk circulating the deal, most of which is coming from the opposition party, Parti Keadilan Rakyat (PKR).
On April 21, PKR’s trade and investment bureau chairman Chen Wong said the bond issue is shrouded in secrecy, allegations that were made without solid proof apart from some hearsay from the press.
For example, Wong asked to why bonds were issued through a private placement format instead of being done publicly and why was only one foreign financial institution, Goldman Sachs, hired to underwrite the hefty amount of US$3 billion, which is of a similar size to the Republic of Indonesia’s recent two-tranche public sovereign issuance bond.
Wong also accused the government of overcompensating Goldman claiming the US bank was paid about MYR220 million (US$72.6 million) whereas local banks would have only charged about six figures, and questioned why the use of proceeds were not publicised.
Rather than show that the government is up to no good, Wong’s accusations show a willingness to use people’s lack of knowledge about financial markets to make a political point.
While it is true that the issuance of 1MDB’s private placement came at a bad time from a public relations point of view – barely three weeks before Malaysia’s general election on May 5 – the sovereign wealth fund had a genuine need to access capital markets and urgently as well.
The route taken by 1MDB to raise US$3 billion to fund a MYR18 billion partnership with Abu Dhabi via a private placement was seen as ideal at that point in time as the government entity needed the capital shortly after it officially sealed a strategic partnership with the Middle Eastern country on March 12.
Private placements were seen as perfect for 1MDB’s case.
Unlike a public offering, private placements don’t require underwriters or registration with the Securities Exchange Commission. While often used by small companies, such placements are equally beneficial to issuersof all sizes because they require less time and expense than a public offering. It is a standard fundraising tool in Europe and the US.
Additionally, the deal was a structured in a way that is puttable at 100% in the event of change of control and given the massive size of US$3 billion, the need for a bookrunner with ample US dollar liquidity was crucial. Goldman makes sense in this regard. Reaching out to several bankers would also require additional time which 1MDB did not have.
A private placement bond gives the issuer more flexibility and capital in a much faster fashion than searching for venture capitalists, waiting for shares to sell on the public market, or even selling a public bond.
In response to the furore, the sovereign wealth fund issued a statement on its website that it “chose the optimal path in light of the various considerations” and ensured “the timely completion of this [Abu Dhabi] economic initiative”.
In order to proof that it has no malicious intentions, 1MDB eventually outlined the usage of its funds – albeit nearly a month late – in order to reassure investors and the public, even given the fact that there is no official need to declare the use of proceeds in a private placement structure.
“The proceeds from the US$3 billion capital raised is being utilised for investments in strategic and important high-impact projects like energy and strategic real estate which are vital to the long term-economic growth of both countries,” it said in a press release on its website on April 15.
All this came about when Malaysia’s opposition party led by Anwar Ibrahim called for 1MDB’s abolition as part of its election manifesto, claiming the 1MDB is a plank of prime minister Najib Razak’s New Economic Policy, duplicates the functions of the country’s pension fund Khazanah Nasional.
But beyond that seemingly tame policy call, Anwar has claimed that the debt assumed by 1MDB could bankrupt Malaysia. The sovereign wealth fund has issued MYR10.8 billion in debt year-to-date, taking total bonds issued to over MYR20 billion, according to Bloomberg, but this is still not enough to sink the country.
At a time when financial markets in the Asian region are looking to boost their debt capital profiles globally, Malaysia must realise that such scaremongering is unproductive and uncalled for. All parties – including politicians themselves – should play a more positive role in encouraging the development of its markets and avoid politicking in pursue of their own selfish agendas.
Euromoney Institutional Investor PLC
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