Abu Dhabi's IPIC pays interest on 1MDB's bonds amid dispute

[KUALA LUMPUR] Abu Dhabi's sovereign wealth fund paid interest on 1Malaysia Development Bhd's bonds amid a dispute between the two on who is required to meet the debt obligations. 1MDB's bonds surged.

1MDB defaulted on another coupon payment, International Petroleum Investment Co said in a filing to the London Stock Exchange. IPIC paid US$52.4 million on 1MDB's 5.99 per cent dollar- denominated notes that it had guaranteed, it said. 1MDB didn't immediately comment on the IPIC statement.

The two funds have been locked in a dispute which spilled over to repayments on 1MDB bonds. That led to a default by 1MDB in April, hitting the reputation of the Malaysian government who is its sole shareholder and adding to financial scandals that have rocked the company and nation. IPIC subsequently made the US$50 million interest payment, and it said then and reiterated Wednesday it's asking 1MDB and Malaysia for reimbursement.

"You might find the IPIC-1MDB issues annoying but they are just playing hardball with each other," said Luc D'Hooge, head of emerging-market bonds in Zurich at Vontobel Asset Management, which managed US$22 billion of fixed-income assets. He holds 1MDB's 5.99 per cent notes. "I was not at all concerned."

The US$1.75 billion 5.99 per cent bonds due May 2022 climbed 3 cents to 103.8 cents on the dollar to yield 5.25 per cent as of 5:20 pm in Hong Kong, according to prices compiled by Bloomberg. Similarly maturity IPIC bonds yielded 3.03 per cent.

"The 1MDB bonds are cheap and I was hoping to add more to our holding should there be more forced selling under another default this week," Mr D'Hooge said. "We have a good appetite for these bonds as it's a good buying opportunity."

The ringgit extended gains against the dollar after the IPIC statement, and closed 0.3 per cent higher at 4.035 per dollar, according to prices from local banks compiled by Bloomberg. The nation's benchmark FTSE Bursa Malaysia KLCI Index gained 0.5 per cent, the most in almost three weeks.

1MDB, 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. It has consistently denied wrongdoing.

The spat between 1MDB and IPIC is related to 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.

IPIC said on Wednesday that it will send a written demand to 1MDB and the Malaysian finance ministry to fully indemnify it for US$1.2 billion plus accrued interest. The payment the Abu Dhabi company made last month was for 1MDB's 5.75 percent privately-placed bonds that were sold in October 2012.

"The way IPIC is looking at it is that whatever they are paying, it seems that they are going back and demanding that 1MDB or the Malaysia Ministry of Finance" pay back that amount, said Rehan Akbar, a Dubai-based analyst at Moody's Investors Service.

1MDB said on Monday that it plans to reach out to bondholders on May 23 to explain its dispute with IPIC and how it plans to meet future obligations. It is also asking investors to hold off any request for early repayment on its Islamic debt, a person familiar with the matter said last week.

1MDB's missed bond coupon payment in April highlights uncertainty around the finances and governance of the fund, Sagarika Chandra, an associate director at Fitch Ratings wrote in a May 10 note. The risk to the sovereign credit profile lies more in the potential for the affair to weaken policy focus or contribute to political instability, even as there are little signs of those risks materializing, she said.

"Our view is still the same, that 1MDB remains a close contingent liability for the Malaysian sovereign," Chandra said Wednesday. The total outstanding debt of 1MDB and Malaysia "is not sufficient for us to change our view of the sovereign," she said.

BLOOMBERG