Malaysia: 1MDB Defaults on Bond Payments

Malaysia's debt-ridden government investment fund 1Malaysia Development Bhd., at the center of a graft scandal that has shadowed Prime Minister Najib Razak, announced Tuesday that it has defaulted on a series of bonds.

The default dealt another blow to Malaysia's image in capital markets, with the country's ringgit currency dropping for a fourth day in its longest stretch of losses since November and stocks plunging to a six-week low.

The default on a $1.75 billion bond 1MDB issued in 2012 stemmed from its withholding of a U.S. $50 million interest payment amid a dispute with Abu Dhabi’s International Petroleum Investment Co (IPIC)., the co-guarantor of the bonds.

1MDB said in a statement that the missed payment triggered cross defaults on nearly two billion dollars of the fund's debt, including borrowings that are guaranteed by the Malaysian government.

It said however that the cross defaults were “limited.”

Credit raters said the Malaysian government has the ability to foot the bill on any debt it has guaranteed.

The Bloomberg financial news group quoted Yee Farn Phua, a Standard & Poor rating agency analyst in Singapore, as saying that the 1MDB’s default may prompt other bondholders to demand payment earlier than scheduled.

But he said he expects the Malaysian government to make good on the debt it has guaranteed or supported.

“1MDB trusts that the respective parties and the financial markets in general, will understand this unfortunate default as being very specific to its dispute with IPIC and is not due to an inability to make payment when due,” 1MDB said in its statement.

1MDB is mired in debt of more than U.S. $11 billion. It is under investigation over claims of money laundering and embezzlement in Malaysia and half a dozen countries.

Global investigators say they are looking into possible misappropriations of about U.S.$ 6 billion, the Wall Street Journal quoted a person familiar with one country’s probe as saying.

The Wall Street Journal, citing Malaysian and global investigations, has reported about how investigators have found more than U.S. $1 billion was transferred to Prime Minister Najib’s personal bank accounts, the majority originating from 1MDB and moving via a web of intermediary entities.

Najib has denied wrongdoing or taking money for personal gain.