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1MDB payment default increases contingent liabilities, credit negative for rating: Moody's

KUALA LUMPUR: 1Malaysia Development Bhd's default on its bond coupon payment has raised the probability that the government will have to assume debt servicing obligations related to these 1MDB liabilities.

This would lead to a credit negative for Malaysia's sovereign rating, said Moody's.

The sovereign rating agency, which affirmed Malaysia as A3 stable early this year, has estimated the total size of these contingent liabilities linked 1MDB's recent default to be around 2.5 per cent of GDP.

1MDB had on Monday defaulted its payment which raised the risks that contingent liabilities - through cross-defaults and an associated indemnity – will `crystallise' on the government balance sheet.

The US$1.75 billion 5.75 per cent notes were issued by 1MDB Energy (Langat) Limited and due to mature in October 2022.

The failure to service the coupon payment triggered a default that has prompted a call on a guarantee by the International Petroleum Investment Corporation (IPIC).

"The failure to pay on the part of 1MDB also triggered a cross-default on other instruments guaranteed by the Malaysian government," it said, pointing out that 1MDB and the Ministry of Finance had pledged to indemnify IPIC with respect to any payments related to the guarantee, as well as other disbursements.

"We estimate the total size of these contingent liabilities associated with 1MDB's recent default to be around 2.5 per cent of GDP."

Yesterday. 1MDB announced a cross-default has been triggered on RM5 billion (US$1.3 billion) 5.75 per cent sukuk due 2039 and the RM2.4 billion 0.35 per cent sukuk issued by Bandar Malaysia Sdn Bhd (unrated) due between 2021 and 2024.

Moody's also pointed out a "material adverse effect" clause that may be triggered on a RM800 million loan from the Social Security Organisation.

"As there are explicit government guarantees on both the 1MDB Sukuk and SOCSO loan, the cross-default increases the probability that the government will have to assume debt servicing obligations related to these 1MDB liabilities."

The RM5.8 billion in explicit guarantees amount to about 0.5 per cent of GDP.

"Although recent developments have increased the likelihood of the Malaysian government expending fiscal resources to pay this indemnity, the risk remains contingent."

The potential costs should be added to the government's stock of explicitly guaranteed debt, which amounted to 15.4 per cent of GDP as of end-2015, up from 12.8 per cent in 2011.

" Indeed, the contingent risks associated with 1MDB's non-guaranteed liabilities may be as high or even higher than the government's actual explicitly guaranteed exposures."

Moreover, the inability to rein in these off-budget risks stands in contrast to the on-budget improvements to the government's fiscal position.

1MDB's overall debt, according to latest publicly available data, which date back to 2014, is around RM42 billion, or less than 4 per cent.

This figure does not incorporate the progress made by 1MDB over the past year in paring its debt through various asset sales.

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