KUALA LUMPUR: 1Malaysia Development Bhd (1MDB) has said repatriating its multi-billion ringgit fund in the Cayman Islands to Malaysia would have exposed the money to fluctuations on the foreign exchange market.
The ringgit has declined by about 6.5 per cent since the past nine months to RM3.49 against the US dollar.
1MDB chairman Tan Sri Lodin Wok Kamaruddin said it had placed the fund in the Cayman Islands to maintain a strong liquidity position with a truly diversified global portfolio.
Todate, it has redeemed a significant portion, US$1.4 billion (or RM4.87 billion), of the fund and expects to redeem the remaining amount in the coming months, Lodin said in a statement posted on its website.
Former Prime Minister Tun Dr Mahathir Mohamad previously highlighted that a large part of the money raised by 1MDB via sukuk issuance was sent to Cayman Islands, a move which many had also questioned.
Critics have complained the lack of transparency in how the money is managed out of the Cayman Islands. It has been estimated that at least RM18 billion of 1MDB's money is parked there.
Lodin stressed that there was nothing unusual about companies of 1MDB's size investing their funds in the Cayman Islands, pointing out that it is one of the largest registered fund jurisdictions internationally, with the Cayman Monetary Authority a leading fund regulator in the world.
"Thousands of international blue-chip companies have funds regulated by the Cayman Monetary Authority, including over 200 Malaysian companies," he said.
Lodin explained that in 2009, 1MDB and a Saudi Arabian company had formed a joint venture to facilitate long-term economic cooperation between Malaysia and Saudi Arabia.
Due to various factors, both parties, however, decided against it. Since then, 1MDB’s investment in the company was converted into a fixed income instrument in Murahaba notes, which is essentially a loan, with an annual interest rate of 8.75 per cent.
Lodin said the loan was paid back in full, for US$2.32 billion with a profit of US$488 million, in 2013.
"Repatriating these funds to Malaysia would have exposed them to fluctuations on the foreign exchange market, as being witnessed at the moment," he said.
Lodin said he was surprised that both the media and certain individuals had suggested that the company has failed to respond to various questions that have been directed at it over the past months.
"We welcome debate, and as a company that is wholly-owned by the Ministry of Finance – and by extension the people – we believe that public scrutiny of 1MDB is a good thing, and will only serve to strengthen the company and its governance.”
He said 1MDB had held meetings with the media and taken various measures such as issuing multiple statements responding to allegations directed at the company.
Apart from the Cayman Islands funds, Lodin also addressed several issues, including its funding and debt levels.
Lodin said 1MDB raises and invests its own capital, and does not receive any funding from Putrajaya, beyond the RM1 million in equity it received when it was first set up in 2009. This, he said is unlike a sovereign wealth fund which is directly funded by government and invests on its behalf.
"Given that 1MDB does not receive any funding from the government, it is therefore simply not true to claim 1MDB is investing or worse, wasting the state’s – or the people’s – money," he said.
Dr Mahathir had repeatedly raised questions about the heavy debt and usage of funds at 1MDB and had complained about its operations via his blog as well as at various media conferences. It also comes amid the ringgit's slide against the US dollar, which has caused a ballooning of part of 1MDB's debts which are in the greenback.
1MDB has a sizable portion of its total RM41.9 billion debts as at March 31 2014 in the US dollar denomination.
Lodin said since 1MDB has to fund its own operations, the company would have to, from time to time, raise capital on the international debt markets to finance some of its projects.
He assured that all of the firm's debt is backed by solid assets, which include 15 power and desalination plants in five countries as well as its property portfolio which includes a 70-acre dedicated financial district Tun Razak Exchange, Bandar Malaysia mixed development in Kuala Lumpur and 234-acres land in Air Itam, Penang.
He said 1MDB’s total assets stood at RM51.4 billion as of the year ended March 2014, which "comfortably exceeds" the value of its total debts of RM41.9 billion for the same period.
"This means that the company has net assets of close to RM10 billion, representing the value it has created since its inception five years ago. Furthermore, this does not take into account the expected benefit to be realised from the initial public offering of the group’s energy portfolio, which will help de-leverage the group and contribute towards reducing its debt profile," he said.
Lodin also addressed comparisons made by its detractors over the 5.75 per cent interest rate for the RM5 billion Islamic bond issued by the company in 2009, with the RM100 million bond taken by national oil company Petronas, which only paid an interest of 3.6 per cent.
Stressing that the comparison was unfair as it does not take into account numerous factors such as maturity rates, Lodin said Petronas' bond only has a tenure of three years, whereas 1MDB's has a 30-year tenure.
"When subscribing to a bond, lenders take on a certain degree of risk and the longer the tenure, the higher the risk for the bondholder. Therefore, bonds that have a longer maturity period typically have a higher interest rate.
"As such, given the significant difference between the maturity periods, it should not be surprising that the bond issued by 1MDB had a higher interest rate," he explained.
He noted that 1MDB's bond was the first Malaysian bond with a 30-year tenure, and the first Islamic bond to be issued with a maturity period of that length.
On claims that the firm had overpaid to buy its power assets, Lodin said it believed that the value paid for those assets, which may have involved a premium in certain instances – as is common when acquiring another business, is commensurate with their existing and future potential.
He said since it first bought its energy assets in 2012, 1MDB had become Malaysia's second largest independent power producer, with a strong international presence. In total, its energy business has consolidated 5594MW of net capacity, comprising both gas and coal fired plants.
"This portfolio provides the business with healthy cash flows and enables 1MDB to participate in bids for coal and gas fired plants, the two primary fuel source for power generation assets in the markets that the company operates in, allowing it to create further value and drive future growth. As such, the economic benefit gained from these assets means that the company has recuperated any excess value it may have paid at the time of the acquisitions," he said.
Lodin denied that 1MDB was given preferential treatment on power contract for a 2,000MW coal fire plant known as Project 3B, after claims surfaced that its bid was not the lowest offered.
Lodin said such rationale was flawed as it had failed to consider that any award was based not solely on tariff alone but on other factors such as experience, track record and bidding price.
On claims that 1MDB had overpaid for the Air Itam land, Lodin insisted that the amount paid was not only commensurate with its value but highly attractive especially since it is difficult to find such sizable plots that are suitable for large-tier development projects.
1MDB had paid RM1.38 billion for the land.
Lodin said other developers have paid to buy land in neighbouring areas which, at over RM200 per sq ft, is substantially higher than what 1MDB paid.
"In fact, in one instance dating back to 2013, a total of 9.8 hectares in Air Itam were purchased for RM267.4 million, about RM251 per sq ft, for a mixed-use development. In another, RM251 per sq ft was paid for a mixed development.”
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