Following is the full transcription of the talkshow ‘Bernama TV with Arul Kanda’ with respect to 1MDB helmed by host Suriati Sanusi and deputy editor-in-chief (economic service) Mikhail Raj Abdullah.
1. What is 1MDB?
1Malaysia Development Bhd (1MDB) is a company which is 100 percent owned by the government.
It was set up as a strategic development company with a vision to catalyse and stimulate foreign direct investments as well as do things differently for the government.
“We should understand the business model and capital structure of 1MDB. When it was set up, the government decided it should fund itself through debts - bank loan and capital market.
“The reason behind that was to create discipline where you have debt, you have to pay interest and principal as well as freeze up government fund for other purposes like schools and hospitals and so on.
“The debt will be used to acquire high quality assets, real estate and energy.
1MDB is the largest power producer in Malaysia and has 13 power plants in five countries around the world producing 5,500 MW.
It also has the biggest plots of land strategically located in the capital city.
There was a mismatch in cash flow generated from these long-term assets versus short-term needs to service interest and also some portion to serve principal that came due.
So, it is a cash flow mismatch. And, having access to the problem, the government took clear steps to implement the rationalisation plan to overcome this cash flow mismatch through selling equities in some of 1MDB’s assets in order to raise fund and pare down debts.
3. How to pay debt?
If you look at projects like TRX, Bandar Malaysia, the consolidation of three different independent power producers (IPPs) under Edra Energy, these are all strategic projects that 1MDB envisioned and carried out.
So where we are today, is a problem that any business faces, which is this cash flow mismatch due to internal factors and also external factors.
However, what’s important though, we have taken steps to rectify the situation. Alhamdulillah, where we are today, we have good interest in equities that we are going to sell and we are going to make progress on that front.
4. What happens in the years to come?
In terms of energy, all our power plants are up and running. We purchased existing power plants and the cash flow from Edra Energy is close to RM5.0 billion per annum of income or revenue generated from those plants.
On the other hand, I’m proud to tell you that this year itself 1MDB has sold about RM1.3 billion of land in TRX.
So, we are the master developer, we are spending close to RM3.0 billion to build an infrastructure. We now divided the land plots and we have successfully sold those land.
We have sold major plots of land to Mulia Group in Indonesia, Affin Bank, Lembaga Tabung Haji and a joint venture with property and infrastructure group Lend Lease.
5. What went wrong internally, will the people’s money be jeopardised? (Turning point mismatch)
In terms of direct equity from the government, it was RM1.0 million. And of course earlier this year, as part of the rationalisation plan, 1MDB borrowed RM950 million from the government.
Now separately, the government has also provided certain guarantee options on our debts. But it is important to understand, if you look at the guarantees - RM5.8 billion, and then letter of support, and some other debts which totalled about RM18 billion.
In the context of Malaysia’s gross domestic product of RM1.1 trillion, that is just under two percent. In the context of government's debt as a whole of about RM630 billion, its about three percent.
So, while the numbers are large they’re are manageable and through the rationalisation plan, we are now in the process of selling of equities in our energy company, Edra Energy.
We’re seeking development partners to buy equities in Bandar Malaysia and we have “debt for asset swap” with IPIC.
The sum total of this three transactions can result up to RM42 billion 1MDB debt being reduced or repaid over time.
6. I doubt you can get money. Can you get a good selling price for IPP equities as their contracts will end soon?
If you talk to me by the end of the month, then we will be able to reveal to you the outcome of our sales process of Edra Energy.
But what we can tell you, we have 11 interested parties that expressed desire to purchase equity in Edra Energy.
We are now narrowing down to four parties and from the four parties, three bidders have submitted final and binding proposals.
So, Tenaga Nasional Bhd is one of them and the two others are foreign entities.
7. Time frame, period to resolve those debts?
The bulk of our assets are actually long term assets, over 80 percent of our debt are long-term in nature.
So the short-term debt portion can be managed through receipts of proceeds from the sale of Edra Energy for example. As well as when we are getting developing partner for Bandar Malaysia. The idea is the purchase of equities in Bandar Malaysia will generate cash to pare down and manage our debts.
So, we are very confident that by the end of 2015, we would have signed three agreements; the sale of Edra; the sale of equity to development partners for Bandar Malaysia and the “debt for asset swap” with IPIC.
Of course, the cash will be coming over time as usual. In terms of a legally-binding agreement, that’s our target to complete by the end of the year.
The restriction in Malaysia is that foreign bidders can only own up to 49 percent of local power plants. We also have assets overseas and the discussion with the bidder is on ongoing.
8. Tell us more about TRX.
TRX is an exciting development. The first phase of TRX is to be completed by 2018, we have world class property companies to develop TRX.
TRX have the largest MRT lines, the largest MRT station in KL.
9. The perception of bringing you in is to clean up the mess and cover up for some else. Is this assumption true? How did it become a mess?
Absolutely no cover up in relation to 1MDB. Even if there were attempts to do so, it’s impossible. We have five investigative agencies looking at 1MDB from BNM, AG, MACC, PDRM and PAC. All these agencies have been given close cooperation in order to establish an independent investigation of what happened in 1MDB. Those investigations are ongoing and we are cooperating fully with the local authorities.
In relation to the companies (IPPs), take a few steps back.
To purchase on behalf of the government, previously owned by certain individuals, leads to earlier administration, so the original IPP. The government has considered to consolidate these companies, to use them as a platform to hopefully rationalise energy tariff in the future.
As for real estate, the government acts as the master planner and sell down plots of land in these strategic parcel so the benefits from the sale, will come back to the government via 1MDB, which is a 100 percent government-owned company.
Challenges the company faces over time, are the delay in IPO of energy business. We are funded through debt and that debt was used to purchase energy business and plots of land.
Now, IPO initially should happen in 2013, and then the second attempt in November 2014. Undertaking IPO is very difficult. That was the turning point at which the need to service interest and principal on short term basis caught up by the lack of cash flow of the company.
10. What comes to mind if given the opportunity to settle 1MDB?
The reality today, we are at the cross-road in a situation where there is the need to service debt and the need to invest in businesses - real estate and energy - these require additional capital.
Given the scenario that we are facing today, having discussed with the shareholder, MoF (Ministry of Finance), we are confident of the rationale plan. The best option would be to dispose assets or bring in new investors in Bandar Malaysia in order to pare down debt to a sustainable level.
We should be given the opportunity to implement the plan in order for the company not to have to go back to the
11. Is it possible to turn around the company?
As rationalisation, we have three options - to get more equity, sell assets and pay debts, and bring in equity from third parties.
Two statements almost everyday. High level of transparency linked to MoF.
1MDB financial account is publicly available. The notes to the account are extremely detailed. Very few companies in Malaysia have that level of disclosure in the notes of its account.
We have made a lot of details, press release, interviews. This represents continuous efforts to share information to the public including publication of a booklet by Jasa which provides detailed Q&A about 1MDB.
We hope for this continuous engagement, more can be shared.
13. Document leak?
What is important is contact. Very easy to take excerpts from document and build stories from it. That is why the cabinet in March asked the auditor-general to conduct thorough review on this. Complete the final report by year-end.
It is better that the lawful authorities take this review and share to the public the findings and outcomes. Remember PAC is bi-partisan, so there will not be a cover-up, and appropriate judgment needs to be formed accordingly.
14. Fund in Singapore?
If you look back in the notes of our account, it is clear from September 2012, 1MDB had originally made investments in Petrosaudi's equity and loan. Over time, the funds were converted into units so since September 2012, it had always been fund units. In 2014, 1MDB redeemed those fund units, redemption carried out in two ways, one in cash through sale by fund manager and portion of the units were monetised through sale of the fund units.
15. Define what are fund units?
If you have unit trust investment, what you have are units. Those units represent ownership of various underlying assets. So we have ownership of a fund which is represented through these units which summarised the underlying investments. From our side, this US$2.33 billion on March 31, 2014, 1MDB had redeemed approximately US$1.4 billion dollars of that in cash, that cash being utilised for various purposes and we are left with US$940 million.
The fund is Cayman-registered but we had a custodian bank BSI in Singapore. Custodian is an interface between the owner and the fund manager, so doesn't mean that the fund is there, rather it is the interface we had with the bank as our custodian.
Having redeemed US$1.4 billion in cash, we now have US$940 million of fund units.
As part of the rationalisation plan, we are going to do a “debt for asset swap” with IPIC.
14. Where is the RM42 billion? Did it go into somebody’s pocket?
No. The money has been fully accounted to various financial statements 1MDB had issued in June this year. So every sen of the company has been accounted for and can be reviewed.
15. Where did it go? Where is the fund?
From my perspective, I can deal with facts and figures, to the extent (if) there are other parties or third parties making these allegations then they need to submit requisite evidence and proofs to the authorities.
16. How about the falsifying of bank statements to PAC?
I am not aware of that exact argument. As I said earlier, 1MDB financial statements are public documents. As far as we are concerned we have only submitted one set of financial statements to SSM.
17. So RM42 billion by January, can you have a different figure, a lower figure? And then how much are you paying monthly to service your debts?
In terms of the rationalisation plan, the objective that I have said earlier is to substantially reduce the debt of the company. If you look at the IPIC transaction that should reduce our debt by RM16 billion and from the sale of Edra, we aim to reduce the debt to between RM16 to RM18 billion. So that RM32 billion reduction in our debt.
In relation to Bandar Malaysia, we discuss some numbers earlier that the value of the company is probably about RM10 to RM11 billion. So depending on how much we sell, we will reduce that by that amount.
So, however you look at the rationalisation plan, it will substantially reduce the debt of the company. We hope to execute all those agreements by end of this year and then hopefully for the money to then come in very soon after. In terms of our interest burden, in the last financial year we have spent RM2.4 billion on interest service.
I think that shows you the extent of the financial liability on the company, which is why we need to have a fundamental solution to fix the problem.
18. So let’s talk about defaulted payments. You defaulted twice on debt payments?
No, that is not true. 1MDB has never defaulted on any of its debts.
19. I beg to differ, I think you defaulted? That is why there was a lot of controversies on your ability to pay out the debt. This was about a few months ago.
Please show me where we have defaulted. 1MDB has always met our debt payments. Of course we are constantly in our discussion with our lenders and our debt holders on managing the payment profiles but we have publicly announced this year the number of major debt repayments, for example in February we repaid RM2 billion to a consortium of banks.
20. Are they Swiss banks?
Five banks. We paid RM600 million loans to one bank. And of course in June we paid US$975 million, so that’s about RM3.6 billion to a consortium of foreign banks. So this is evidence of debt repayment by 1MDB and of course as we spoke about earlier, we have constantly met all the interest payments that they will come to you.
21. What is the next payment due for coupons or bonds?
The next payment will be in November, we have a coupon payment for the RM5 billion sukuk that 1MDB issued in 2009. So, that's about RM145 million approximately.
22. And the investors were?
Primarily domestic investors because it was a ringgit sukuk.
23. There is widespread criticism that investment of government-owned companies are investing in 1MDB, we are talking about Tabung Haji, we are talking about KWAP, EPF and even TNB which are considered as government entities. So they say it is all a bail out rather than going to the market and getting to the market and getting foreign buyers? What is your take on this?
First of all when you look at Tabung Haji, they purchase a plot of land so that land is now theirs in a very vibrant and dynamic development called TRX and we are very confident that they will be able to develop and sell that land as they deemed fit.
In terms of KWAP, EPF and so on, they have purchased bonds and all loans of the power companies issued by the power companies. So, these bonds are secured on the assets of the power plants and have cash flows from the PPA (power purchase agreements) assigned to them for repayment. So in my view the ability to service those debts is quite secure and quite strong.
Now in terms of your third point, first of all Tenaga Nasional is only 30 percent owned by Khazanah which is a government entity and it is a public listed company. TNB is by their own admission one of the bidders in our sale of Edra, but as we spoke about it earlier we actually have four shortlisted bidders. Of which three have submitted binding and final bids.
Now we are going through the process of assessing that and the board of 1MDB and the shareholder of 1MDB will look at the value generated and the payment terms and all the other terms and conditions before deciding. So it is not the foregone conclusion that it is going to go to one party or the other.
24. All right, going back to Tabung Haji purchasing land, a piece of land in TRX. They said the amount that they’re paying is not equivalent to the price of the land that is supposed to be, they were paying a little bit more that what they’re supposed to. In short, it is also a bail-out.
That’s absolutely wrong. If we look at the comparable land prices for that type of location, Tabung Haji in fact paid a lower price, I think you can ask any real estate valuers or market specialists who would confirm that. Now, over and above, 1MDB has subsequently sold land in TRX at per square foot prices higher then what Tabung Haji has paid.
So, again I urge you to look at the transaction that we have publicly announced which shows that overall, Tabung Haji got a good deal on that plot.
25. Financial problems faced by 1MDB seemed to be exerting additional pressure on the ringgit, and is already under pressure by US rates and all that, it has rattled investors’ confidence, and the market totally agrees with this. What are your thoughts on this? Do you agree with this assumption?
If you look at the last one month and access the volatility in the ringgit, the ups and downs of the ringgit value and you pluck that against the news on 1MDB, you will see that there is no correlation. Right? I think the ringgit is influenced by oil prices for example by concerns about emerging markets just like the Brazilian riyaal, the Norwegian kroner or the New Zealand dollar.
All these currencies are linked either to commodity prices or to emerging market concerns. There was also the devaluation in China, which again caused some issues. Now, that's not to say 1MDB has zero impact, I agree with you that there is some impact of the uncertainty around that but I would also suggest that various political uncertainties in the country have also influenced the value of the currency.
So there are multiple factors at any point in time that determine where a currency trades including views of traders buying and selling inventories and so on. So to say that it’s because of one company, I think it’s stretching the point too far.
26. What can you say to investors to allay such concerns over the ringgit?
Two things. Number one, we have never defaulted on our debt, we have met principal and interest service when due. And number two, we have a plan which is the rationalisation plan to progressively dispose of assets or to bring in new equity in order to reduce the debt of 1MDB. So from that perspective, investors should take comfort that we recognise the challenges. We are open about it and we are here to fix the situation.
27. A few weeks ago, the Conference of Rulers issued a statement demanding the leadership to resolve the 1MDB crisis as soon as possible. This is unprecedented, so what do you have to say as group president and CEO of 1MDB?
So, from the perspective of 1MDB and government of Malaysia, we take very seriously and respect the opinions and views expressed by all parties, the rakyat, the government, the opposition, as well as the rulers of the country. So the government has shown its firm and committed approach to 1MDB through the rasionalisation plan, and I hope in the cause of today’s discussion it will become clear on what our objective is. Which is to dispose of assets or sell equity in order to reduce the debts of the country.
These efforts are on-going as we speak and we hope to have a resolution by the end of the year as promised by the PM (prime minister) in June 2015.
28. There is this saying that goes ‘There is no smoke without fire’, right? So there are allegations from Dr Mahathir Mohamad, the opposition, foreign and local media. Are they all totally wrong?
So, again Michael, the position that I would say is we need to deal in facts and we need to deal in figures. Each time certain allegations have been made the company has issued statements, you are more than welcome to check our website to have a very clear picture about the facts. Opinions of course are another issue.
Now Mahathir himself has recently been quoted on video as saying that he did not have enough evidence to lodge a police report against the prime minister. So in my view we need to base ourselves on facts, we cannot rely on hearsay allegations and other unsubstantiated statements without due evidence and due proof.
29. I have to ask you this, you know? Business tycoon Jho Low, was he connected in any way to 1MDB, and have you met him after taking over as CEO of 1MDB?
So it is public knowledge that Jho Low was an adviser to the TIA (Terengganu Investment Authority) prior to the shares being transferred to the government of Malaysia and the name change to 1MDB. Now, he actually resigned in mid May 2009, before the shares in TIA were bought by the government and the name was changed to 1MDB.
From the 1MDB perspective, Mr Jho Low has never been paid by the company, he has never been hired by the company, and the operations of the company are run by the management and the board of 1MDB. With oversight from the shareholders which is the Ministry of Finance.
30. And you are dealing with all these companies and subsidiaries and principals overseas, are any of these companies owned by Jho Low?
As far as we are aware, no. So our interactions are with our legal counterparts and whether they have other business interest is something outside of our knowledge.
31. Strategically, where would you see 1MDB, probably in three years’ time?
So, the original idea of 1MDB, which was to be a catalyst and to act as a strategic development company, in my view it has been achieved through various examples we have discussed which is consolidation of the power industries, development of Bandar Malaysia, and also TRX.
Now, going forward and given the challenges that the company has faced, we have had to take decisions in order to rationalise and change some aspects of the business model. So, what we are focused on at the moment is in achieving the objectives of the rationalisation plan. I think in terms of what happens next to the company, that is something I am in constant discussion with our shareholders. Once we get through this phase I am sure there will be further announcement on what happens next.
32. When are you going to submit the accounts. Your excuse was that you were under investigation, and they took your papers and things like that, don’t you have copies to complete the accounts?
To complete the accounts, you require original documents for the auditors to sight. Our original documents were substantially all taken away in the PDRM raid on July 8, 2015. So accordingly, we have obtained an extension and legal extension from the CCM (company's commission) to submit our accounts by March 31, 2016.
33. So you are waiting for the papers to be sent back to 1MDB to complete the accounts, until then you can’t do it?
That’s correct. In terms of the original documents for auditors to review and audit, and confirm the accuracy.
34. What if the investigation stretches to one year, more than March 31, what then?
I think we have to deal with one step at a time, and of course for our energy subsidiary and our real estate subsidiary, the accounts are almost finalised, they are almost ready. The issue is that the holding company level where our documents were taken away. We will deal with it one step at a time.
Let’s see if as and when the authority will return the documents for the holding company’s accounts and we can then act on it accordingly.
35. This one question I have to ask you. This controversy about the money and the donation going into the prime minister’s account, in any way is 1MDB involved in such an allegation?
Absolutely not, and in fact the MACC (Malaysian Anti-Corruption Commission) has publicly stated that funds did not go from 1MDB to the prime minister’s account. The MACC has also publicly stated that it is not investigating 1MDB.
36. We are almost to the end of the programme, I will give you the floor to you, Arul. What would you like to say to us, the people of Malaysia, on 1MDB?
What I would like to summarise is that, the idea behind 1MDB was a good one and it has achieved a lot of its strategic objectives. Unfortunately, there were a number of challenges along the way, which resulted in the need to change the plan which is now being implemented through the rationalisation plan.
So we need to be given an opportunity to implement the plan to ensure we meet our debt service obligation, to reduce the level of debt, while of course working with the local authorities of the country to provide them with information as part of their investigations. So I would urge the public to give us the space in order to maximise the asset values so that we do not have to go back to the government in order to implement our plan.
37. Once the have signed the agreement and all that, can you tell us when all the debts would be serviced?
So that is my hope, to be able to provide an update once we decide on how much of each assets to sell and what the proceeds would be. We would definitely issue an update, perhaps end of the year or early next year on where we are going next.