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1MDB bonds decline as deadline for another coupon payment looms

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1Malaysia Development Bhd bonds dropped to the lowest in more than two weeks as the Malaysian state investment company faces another interest payment after defaulting on notes last month.

[KUALA LUMPUR] 1Malaysia Development Bhd bonds dropped to the lowest in more than two weeks as the Malaysian state investment company faces another interest payment after defaulting on notes last month.

1MDB must repay US$52.4 million of interest Wednesday on US$1.75 billion of 5.99 per cent bonds maturing in 2022. It failed to make a US$50 million coupon payment last month on separate privately-placed notes amid a dispute with Abu Dhabi's sovereign wealth fund International Petroleum Investment Co, which co- guaranteed the securities.  The 5.99 per cent notes have dropped 1.79 cents on the dollar this month to 100.54 cents, the lowest since April 22, according to prices compiled by Bloomberg. The bonds are also co-guaranteed by IPIC. 1MDB didn't respond to queries on whether it plans to make the payment.

"Why pay the next coupon if the last one wasn't?" said Zafar Nazim, a London-based credit analyst at JPMorgan Chase & Co. "Nothing has changed. But we don't know about discussions in the background between IPIC and 1MDB, so we can't rule out the possibility of a temporary resolution with regard to the coupon payments."

The non-payment last month was on debt with a 5.75 per cent coupon sold in a private placement in October 2012 and it triggered cross defaults on 7.4 billion ringgit (S$2.51 billion) of 1MDB debt. The 5.99 per cent notes weren't affected. IPIC paid the interest after 1MDB defaulted. It hasn't said what it will do this time.

The two funds have been locked in a dispute over 1MDB's debt obligations to IPIC under an agreement reached in May last year. As part of the pact, the Abu Dhabi wealth fund said then that it would assume obligations to pay interest due under US$3.5 billion of 1MDB bonds that it guaranteed. IPIC said last month that 1MDB was in default of the agreement after the Malaysian fund failed to pay it more than US$1 billion in connection with a loan.

Fitch Ratings said Tuesday there is an increasing likelihood that 1MDB's debt will spill over to the Malaysian sovereign's balance sheet. The investment company, whose advisory board has been headed by Prime Minister Najib Razak, is at the center of multiple investigations stretching from Switzerland to the US amid allegations of money laundering and embezzlement, and has consistently denied wrongdoing.

The situation is unlikely to lead to an immediate crystallisation of existing guarantee obligations of the Malaysia sovereign for 1MDB securities affected by cross defaults, Fitch said.

1MDB plans to hold a call with holders of its dollar- denominated securities on May 23 and has appointed Alvarez & Marsal Asia Ltd as its financial adviser, it said in an e- mailed statement Monday.

"Following last month's default, there is uncertainty about 1MDB making the coupon payment on the 1MDB Energy 2022 bonds," said Manjesh Verma, head of Asia credit sector specialists at Citigroup Inc in Hong Kong. "They have now started a process where they are trying to identify bondholders but we don't expect a quick resolution of the entire issue."

The fund's 4.4 per cent dollar bonds that mature in 2023 have fallen 5.8 cents on the dollar this month to 82 cents, the lowest since April 18. Those securities aren't guaranteed by IPIC.

BLOOMBERG