1MDB paid coupon with its funds this quarter after April default

[KUALA LUMPUR] 1Malaysia Development Bhd paid the interest on its bonds that were due this quarter after the debt's Abu Dhabi co-guarantor was compelled to service the coupons earlier in 2016, which had led to the deepening of a US$6.5 billion dispute.

The payments could be part of an approach by 1MDB's management to amicably settle a spat with International Petroleum Investment Co. PJSC even as the two sides pursue arbitration talks, Malaysia's Second Finance Minister Johari Abdul Ghani said in an interview on Tuesday. The finance ministry oversees the state-owned investment company and is increasingly taking over its assets and projects as the government winds down the embattled fund.

The sovereign companies are locked in a tussle that had spilled over to repayments on two sets of bonds issued by 1MDB and co-guaranteed by IPIC. That led to a default in April, adding to the financial scandals for the Malaysian fund that's already at the centre of global probes into alleged money laundering and embezzlement. IPIC paid the coupons after 1MDB missed them in April and May.

"As far as 1MDB is concerned, the bond is still a 1MDB bond," Mr Johari said of the coupon payments made this quarter. The company's management will decide who should provide the funds to pay subsequent coupons on the two US$1.75 billion dollar bonds, he said. 1MDB didn't immediately reply to an e-mail seeking comment.

IPIC is seeking US$6.5 billion from 1MDB and Malaysian government for failure to perform their debt obligations as the dispute moves into arbitration. Among the issues between the two are billions in allegedly missing funds.

"We had made a payment to IPIC - US$3.5 billion - so if they say they have not received it, this is where we have to sit down and see what happened," Mr Johari said. 1MDB has said it could be a victim of fraud if payments intended for IPIC never made it there, while the latter had denied ownership in the company that 1MDB transferred money to.

The arbitration is still at the case management stage, and 1MDB is simultaneously trying to find a way on whether it can "sit down and resolve this amicably" with IPIC, Mr Johari said.

The Ministry of Finance has taken control from 1MDB of the development of the Tun Razak Exchange financial district, Mr Johari said. The government is also overseeing the Bandar Malaysia development, a mixed-property project in the Malaysia capital that will host as terminal for the Singapore-Kuala Lumpur high-speed rail and offer future access to major highway networks, the minister said."We are going to run off 1MDB, there are no more activities in 1MDB," he said.

Scandals surrounding 1MDB have weighed on investor sentiment in Malaysia, and Mr Johari says the country needs to learn lessons from the episode and recover.

"What I want to stress is that this is something that won't make the Malaysian economy collapse," Mr Johari said of 1MDB and issues including its dispute with IPIC. "We must learn from the mistakes we made. We must make sure we have the right business model, good management and good corporate governance."

BLOOMBERG