DID 1MDB REALLY BUY IPP BIZ FOR A STRATOSPHERIC RM18 BILLION?

by bernie madhoff, donplaypuks® intrepid correspondent for stratospheric ipp affairs

Yesterday's statement by new CEO Arul Kanda, that 1MDB paid RM18 billion to acquire the 3 IPP's - from Ananda Krishnan, Genting and the NS Royal family - is as astounding a disclosure as any we will hear from this much discredited company which is unfortunately owned 100% by the Raykat. Come hell or high water, we the PEOPLE, are stuck with it.

Before this, based on the loans 1MDB took out and other information, the market believed that 1MDB had paid out RM12 billion for the 3 IPPs. Of this, the auditors forced the Board of Directors to write-off some RM3 billion in 1MDB's P&L account, being the difference between the book value of assets acquired and the price paid for them (RM12 billion). In accounting terms, this is described as "goodwill write-off".

We are now told that 1MDB actually agreed to a price tag of RM18 billion for the 3 IPPs, of which RM12 billion was for the (already over-valued) assets and another RM6 billion in "inherited debt"!! 

Note that Kanda did not say RM6 billion in bank loans, but described it, in the usual woolly way 1MDB words its  clarifications, as "inherited debt"? What does he mean by this? Are these bank loans or not? Who was this "debt" owed to? Are off-the-books or the private debts of individuals who have been laundering money to evade tax in Malaysia, being passed off as corporate debts? Why the secrecy over who these creditors were? Whose interest is 1MDB protecting?

This looks exactly like the 2000 MAS share bailout by Mahathir and Daim. The bailout price was RM8 a share when the quoted price on the KLSE was RM3.68. The bailout price of RM8 was arrived at because Tajuddin Ramli had outstanding bank loans and RM3.68 a share would not have been sufficient to cover the bank loan repayment. Tajuddin Ramli may have been declared bankrupt and a local bank may have collapsed. So, the RM8 a share was cooked up to bailout BUMNO/SCUMNO which was the real owner of the controlling MAS shares. TR himself admitted that he was forced into "national service" by the dynamic duo of Mahathir and Daim.

The first question is, of course, how could aged, and old generation assets and expiring IPPs which are completely dependent upon the Government and Tenaga Berhad for extension and power purchasing agreements, command a price of RM18 billion when their book value was only RM9 billion? Who valued it and on what basis?

Or is Arul Kanda wrong? 

It is important for Arul Kanda to clarify whether the actual price was RM18 billion (including RM6 billion "inherited debt') and they paid cash RM12 billion and merely took over RM6 billion of "inherited debt" book creditors, or actually paid off in cash another RM6 billion of "inherited debt". 

The distinction is important. 

If 1MDB just took over the "inherited debt" from the IPPs, then there is no cash outflow from its bank accounts. So Arul Kanda and 1MDB will have to account for what happened to RM6 billion more from the RM46 billion it borrowed. 

Remember that the total borrowings of 1MDB is RM42 billion in bonds etc. + RM4 billion in derivative debts. 1MDB cannot deny that it borrowed RM46 billion because that is also there in black and white in its balance sheet!! 1MDB and Arul Kanda, PM Najib and Deputy Finance Minister Husni have all deliberately refrained from talking about the additional RM4 billion derivative debt, and fudged over it. But as the Indian saying goes, you cannot hide a full pumpkin in half a plate of rice!

The pricing for the Sg. Besi land also looks wrong. The government announced that 1MDB would take over this land in exchange for RM2.1 billion of contractually committed expenses, to be incurred by 1MDB to build 6 army camps. The MoF also generously gifted 1MDB a RM1 billion grant to finance this army re-settlement scheme. So, depending on the accounting policy, the cost of the Sg. Besi land should be reflected as either RM2.1 billion or RM1.1 billion (2.1-1.0). As it stands, the price of this land of 495 acres or 21.56 million sq.ft. @ RM400 million, works out at a ridiculously low RM18.55 per sq.ft. Something is definitely wrong with 1MDB's accounting methods.

It also appears that 1MDB used borrowed money to fund bond and other interest debt, as well as repay loan capital. I have said this countless times - this is a mad hatter's business model and financing scheme. It could only have been thought up by a clueless PM & Finance Minister, and Chairman of 1MDB's Advisory Board with a "degree" in Industrial Economics, who did not plan at all how annual interest of about RM2.3 billion (appx. 5% on RM46 billion loans) would be serviced. 

Rigorous strategising for debt servicing and playing around with cash flow simulations and models is the most basic aspect of financial planning. Yet it would appear that 1MDB sallied forth on a wing and a prayer with a paid up capital of RM1 million and borrowed 46,000 times its cash capital. No one, including PM Najib, thought it necessary to plan way ahead how RM46 billion of loans would be repaid, and annual debt of RM2.3 billion serviced.

And of course, Husni is talking absolute rubbish, that matters should not be addressed merely in terms of RM46 billion in debts, but that the corresponding assets should also be recognised. 

Well, Husni, please don't try and teach your grandmothers how to suck eggs. If you neglected to plan how RM46 billion borrowings and annual RM2.3 billion in debt interest would be serviced using those "assets" to keep the banks and lenders at bay, then you should resign immediately and retire to your village.

And oh, by the way, if RM15.4 billion has been "invested" with entities all connected with Jho Low, then who else should we ask for explanations as to why 1MDB is so fully "invested" that it has no cash to pay its debts? Paris Hilton? Leonardo Dicapro? The Wolves of Wall St.? The King of Arabia?

 Donplaypuks® with stratospheric pricing, man!