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Tue 26 Apr 2016 01:52 PM

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Malaysia's 1MDB says in default on some bonds after missed payment

IPIC, which guaranteed the bond, says it would make the interest payment but only after 1MDB defaulted

Malaysia's 1MDB says in default on some bonds after missed payment
(Getty Images)

1Malaysia Development (1MDB) said on Tuesday it did not pay a $50.3 million coupon on a $1.75 billion bond, following a stand-off with Abu Dhabi sovereign fund IPIC, triggering cross-defaults on some of its other bonds.

The troubled state fund, which is at the centre of a multi-billion-dollar graft scandal, said in a statement it would meet all its other liabilities.

The Malaysian fund said the missed interest payment caused a cross-default on its 5 billion ringgit ($1.28 billion) sukuk (Islamic bond) due in 2039 and a 2.4 billion ringgit sukuk due between 2021 and 2024.

The two state investment funds are locked in a dispute over 1MDB's obligations to International Petroleum Investment Co (IPIC) under an agreement reached last June. IPIC said 1MDB was in default of the agreement after the Malaysian fund failed to pay it $1.1 billion.

IPIC, which guaranteed the bond, said on Monday it would make the interest payment on a $1.75 billion bond that was due on Monday but only after 1MDB defaulted.

The Abu Dhabi fund has claimed that 1MDB and its sole shareholder, Malaysia's Ministry of Finance, have failed to meet the obligations agreed upon in, including the full payment of $1.1 billion, which includes interest.

"1MDB has and will continue to undertake discussions with all bond and Sukuk holders to explain the background of the dispute," 1MDB said in the statement. IMDB's debt rationalisation plan announced last year enables it to meet all its existing debt obligations, the fund said.

1MDB said there would be no cross-default on an $800 million loan from the Social Security Organisation, although a "material adverse effect" clause could be triggered.

The Malaysian fund also said there would be no cross-default on its other remaining debt. It has two other bonds: the $1.75 billion 1MDB Energy Limited, which pays a fixed rate 5.99 percent; and the $3 billion 1MDB Global Investments Limited notes with a fixed rate of 4.4 percent The dollar bonds were both steady in late morning trade.

Ringgit falls

The stand-off between the two state firms has worried markets and left bondholders uncertain about who would pay them their interest payment.

The ringgit eased 0.6 percent to 3.9300 per dollar after falling to as low as 3.9330, its weakest since April 18.

Malaysia's Sovereign Credit Default Swap -- a type of insurance that protects against a country defaulting or restructuring its debt -- rose 4 basis points (bps) to 165/170 bps.

A Malaysian parliamentary committee investigating 1MDB said in a report this month the Malaysian sovereign fund sent a total of $3.5 billion to a British Virgin Islands-registered company to a company called Aabar Investments PJS Ltd. But IPIC said that while the firm had a similar name to its subsidiary it did not belong to IPIC or its subsidiary.

IPIC said it had not received any payments from the BVI company, which was wound up last June, nor assumed any liabilities on its behalf.

What happened to the $3.5 billion after it went to the British Virgin Islands could not be determined, the Malaysian parliamentary report said.

Malaysian Prime Minister Najib Razak heads the advisory board of 1MDB, which is at the centre of a multi-billion dollar corruption scandal. Money-laundering investigations concerning the fund are now underway in at least six countries including the United States, Switzerland and Singapore.

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