Did 1MDB pay Aabar US$1 billion to terminate options?

In 2012, 1Malaysia Development Bhd (1MDB), using subsidiaries, issued two bonds totalling US$3.5 billion (RM11.55 billion) bonds to finance the acquisition of power assets from Tanjong and the Genting Group.

The subsidiaries were 1MDB Energy Ltd and 1MDB Energy (Langat) Sdn Bhd. The total proceeds after netting off expenses and fees to Goldman Sachs and other intermediaries was US$3.1 billion (RM9.3billion).

The two bonds were co-guaranteed by 1MDB and Abu Dhabi’s International Petroleum Investment Company (Ipic). The Ipic guarantee came at a very heavy price because 1MDB agreed to the following:

1) Ipic got to keep RM4.25 billion – 45% of the net proceeds of RM9.3 billion or 37% of its gross debt of RM11.55 billion – as refundable security for the guarantee.

2) Ipic was given a 10-year option to subscribe for up to 49% of the future listing of the power assets. Ipic transferred the option to its subsidiary Aabar Investments and hence, it is called the Aabar options.

As we have argued many times previously, 1MDB’s style of borrowing is an extremely expensive one. It is ridiculous that a company gets to keep only 37% of the RM11.55 billion it borrowed.

It is like borrowing money from Ah Longs (illegal moneylenders)!

If that was not bad enough, 1MDB also agreed to share 49% of any upside on the power plants it bought via the Aabar options.

Just like the money it poured into its aborted joint-venture with Saudi Petroleum took a few twist and turns, the same appears to have happen with the Aabar options.

In its Full Year March 31, 2014 accounts (which was submitted to the Companies Commission of Malaysia only in November) 1MDB made the following disclosures under the Significant Events Subsequent To The End of The Reporting Period:

First, it said that a substantial sum of the US$1.22 billion (RM4.03 billion) redeemed from Cayman Islands was used for debt servicing, working capital and payments to Aabar as “refundable deposits” pursuant to an agreement to extinguish the options. It did not reveal the amount of the refundable deposits but we can assume it was the bulk of the US$1.22 billion.

Second, it said that in May, 2014 it had taken a bridging loan facility of up to US$250 million to finance the acquisition of the options granted to Aabar Investment.

Third, it was also revealed that on May 22, 2014, 1MDB and Aabar had signed a settlement agreement to terminate the options. No details were given except that the final settlement will depend on the final valuation of the IPO.

Lastly, 1MDB revealed that on September 2, 2014, Aabar had written to inform 1MDB that it did not wish to exercise the options and the company had “agreed to compensate (Aabar) at a consideration agreed under the terms and conditions” of the May 22 settlement agreement.

What 1MDB did not disclose was that on September 1, 2014, a day before it received the notification from Aabar, it took a US$975 million loan from Deutsche Bank. Was it also to pay Aabar?

There are two questions to ask about this chain of events that happened during the May to September period.

1) What was the total amount 1MDB had paid to Aabar? If you add the bridging loan of US$250 million plus a substantial amount of the US$1.22 billion redeemed from Cayman and the US$975 million loan from Deutsche Bank, it is a lot of money that 1MDB raised during that 5-month period. How much went to Aabar?

2) Why was there a need to sign the May 22, 2014 settlement agreement? Was there not such a termination clause under the original option agreement signed in 2012 as is normally the case in such agreements? Or is the May 22 termination agreement a revised settlement agreement?

In the name of transparency, good governance and to clear doubts about the utilisation of the Caymans money and the payment to Aabar, 1MDB must reveal details of the original agreement with Aabar and also the May 22, 2014 settlement agreement.

1MDB must also disclose how much money has been paid to Aabar thus far to terminate the options and justify why it had agreed to the amount and went ahead to pay Aabar given that the IPO of its power assets is facing headwinds.

We can already hear Arul Kanda citing “legal and commercial confidentiality” for not answering questions he wants to avoid. But those are the questions the public want an answer to. – The Edge Malaysia, March 2, 2015.

Did 1MDB pay Aabar US$1 billion to terminate options?
2 March 2015

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