1MDB Running into Big Mess?
1MDB has been in the headline recently as it failed to pay off RM2 bil loan due on 31 Dec 2014. Thestar has its full report here. This is just a tip of the iceberg as the biggest concern been the snowballing of its debts due to extensions of repayment of its debts that came due, with additional interest been added on into existing loan.
According to its filing, 1MDB had borrowings of RM42 billion and suffered a negative cash flow of RM2.25 billion in FY14 with its debt servicing at around RM2.5 billion. Who is going to foot the bill with this poor running company? As a sovereign wealth fund, 1MDB has got guarantee amounting to RM5.8 billion from Malaysian government. The exposure by the government is believed to be more than that, in the form of “:Letter of Support” which has some effect of “implicit” guarantee according to some parties.
Yes, it is going to be a big mess with 1MDB having excessive borrowing without generating any positive cash flow. There are likely to be some form of bail out should 1MDB failed to serve its debt.
In the immediate term, we have seen share price of Maybank dropped 4% over the last few days due to the fact that its loan exposure to 1MDB could amount to RM5.5 billion. Based on estimates, a 10% provisioning for this would trim Maybank’s FY15 net profit by 5.6% hence the recent selloff by investors.
Interestingly, 1MDB has just appointed a new President and group executive director on yesterday. Will he be able to outline strategy to turn the company around? Lets wait and see.