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1MDB notes reward bulls focused on scandal-hit bond's backers
[SINGAPORE] Bonds of 1Malaysia Development Bhd have surged despite broadening investigations into the state investment fund's activities, as investors bet on the strength of its backers.
International Petroleum Investment, Abu Dhabi's sovereign wealth fund, paid the coupon on 1MDB's US$1.75 billion of October 2022 notes as the debt's co-guarantor, days after a default in April.
JPMorgan Chase & Co said the debt could rally further to bring its yield premium closer to that of IPIC. Actively traded 1MDB bonds had an extra yield of 220 basis points more than US Treasuries on Oct 14, compared with 101 for IPIC.
1MDB's notes have jumped 18 per cent from their low in late-April, paying off for investors willing to keep tabs on an organisation mired in international investigations into alleged corruption and money laundering.
The next test for the bulls will be on Oct 18, when the next semi-annual coupon for October 2022 bonds comes due.
While it is paying interest for now, IPIC is still seeking US$6.5 billion from 1MDB and the Malaysian government for an alleged breach of contract related to a May 2015 deal, a claim that's in arbitration.
"The debt probably rallied because of trading on the strength of the guarantee," James Lau, a Kuala Lumpur-based investment director at Pheim Asset Management, said by phone Thursday. With the ongoing disputes, investigations and plans to wind down the state fund, there is still risk on the long term over "whether the debt will be repaid," he said.
The 1MDB scandal has helped weaken Malaysia's ringgit by 22 per cent over the past two years amid the nation's weakest economic growth since a contraction in 2009.
Fitch Ratings said in May there is an increasing likelihood that 1MDB's debt will affect the sovereign's balance sheet. Singapore's monetary authority last week fined DBS Group Holdings, UBS Group AG and Falcon Private Bank's branch for breaches in anti-money laundering rules. Political opponents have criticized Malaysian Prime Minister Najib Razak, who led 1MDB's advisory board until the end of May. The premier and the state fund have denied any wrongdoing.
1MDB, based in Kuala Lumpur, declined to comment about the next coupon payment or the status of its arbitration. It said in July it would continue to implement rationalisation plans and remains able to honour its current obligations. An IPIC representative didn't reply to an e-mail seeking comment.
With the pending court arbitration, global investigations and "hide-and-seek" over coupon payments, the worst isn't over for 1MDB, according to Julian Jacobson, a money manager in London at WRM Capinvest.
"I'm still ahead of the game and not getting back in," said Mr Jacobson, who said he sold 1MDB's March 2023 notes in April at a profit.
"Sure the deafening noise doesn't seem to affect the bond price, but I'm fed up of checking all the Malaysian blogs first thing in the morning to find out what new revelations are out there."
Buying 1MDB notes has been profitable for Chresten Hagelund, a money manager in Copenhagen at BI Asset Management, who added the May 2022 securities in August. The escalation in the IPIC-1MDB dispute led the Middle Eastern fund to recognise the liabilities on its 2015 annual report, published in June.
IPIC made two interest payments on 1MDB-related bonds totaling US$103 million in the first half of 2016, Chairman Mansour bin Zayed Al Nahyan wrote in the report.
The payments have been reflected in its financial statement by recording a corresponding receivable balance because IPIC is confident of its claim, he wrote.
"We like this bond given IPIC has publicly acknowledged the guarantee," Mr Hagelund said. "We only bought into it after IPIC changed its treatment from off-balance sheet to on-balance sheet."