1MDB IPO: A chance to get it right
Just when it looked like state-backed 1MDB was finally ready to put its energy assets on the market for Malaysia’s biggest IPO in years, the listing has come up against another delay. That hardly inspires confidence in the sovereign wealth fund. But with a new president in place, there is now a chance to set things straight — not only for the country’s capital markets but also for the sovereign itself.
There has been no end to the controversies surrounding Malaysia’s sovereign wealth fund 1MDB.
For a start, it was facing a backlash from local politicians about billions of dollars it had stored in the Cayman Islands.
Then, earlier this month, reports emerged of its failure to repay an MR2bn ($562.68m) loan from local banks that was due at the end of December. 1MDB now has until the end of January to settle its dues, and bankers are waiting to see if it will meet its obligations.
Then just last week it appointed its third chief executive in two years, former investment banker Arul Kanda.
He inherits a debt-laden vehicle that over the past few years has invested heavily in power plants in Malaysia and elsewhere and must now list to repay the loans taken to buy them.
But the impending IPO is likely to be put off again until the fund sorts out its internal issues, and there are plenty.
Top priority for Kanda should be making the fund more transparent. This certainly includes doing away with the use of offshore tax havens, but might also usefully involve trying to stick to the most public forms of fundraising. The fees paid on a Goldman Sachs-arranged private placement in 2013 attracted particularly unwelcome attention at the time.
It also needs to put an end to the speculation and come clean on why the listing process has taken so long. 1MDB filed an application to list with the regulator as far back as November, yet no draft documents have been forthcoming. The market is owed an explanation for this.
If it wants to be taken seriously as a listed concern, it should start now with full disclosure. With the new management it has a chance to begin with a clean slate.
At this stage, clarity on the timing of the IPO, whether it is six months or a year down the road, would be welcome. And as discussions about the listing have been in the works for a number of years, there is no reason why Kanda should fail to produce a credible timeline and stick to it.
As a quasi-sovereign, the implications go far beyond just another listing, or even 1MDB. The government should realise that as a state-backed entity, and a highly-leveraged one at that, 1MDB has a responsibility to see the IPO through.
While it has not actually defaulted on any of its borrowings thanks to a deadline extension on the loan, the non-payment of the MR2bn last month hardly helps establish a solid reputation. If debt renegotiations are the reason for missing the payment, then resolving this should be at the top of its list.
Loan repayments can’t be extended indefinitely, no matter how strong one’s parentage. For 1MDB to have gone so close to the brink, especially with a debt pile of MR42bn, is a move the market will not take lightly. Already its bond yields are showing signs of stress: this is a red flag it would do well to heed.
To be sure, the project will require lots of political will to get done, but the clock is ticking. There’s a lot at stake with the fate of 1MDB and everyone will be watching closely.