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1MDB bonds steady before deadline for US$603m debt payment

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by July 28, 2017 General
The cost of insuring Malaysia’s sovereign notes from default are at the lowest in almost three years.

The cost of insuring Malaysia’s sovereign notes from default are at the lowest in almost three years.

KUALA LUMPUR: 1Malaysia Development Bhd.’s bonds were steady ahead of a $603 million arbitration payment to Abu Dhabi’s sovereign wealth fund next week.

The obligation is half the amount 1MDB and the Malaysian finance ministry agreed to make to International Petroleum Investment Co. as settlement, with a second payment due at the end of 2017. 

The cost of insuring Malaysia’s sovereign notes from default are at the lowest in almost three years.

That may change if there are snags in the settlement due Monday. 

While Malaysia is regaining favor as investors shrug off far-reaching investigations into 1MDB and focus on encouraging signs of an economic turnaround, Macquarie Bank Ltd. Warned failure to pay IPIC could hurt sentiment and become a contingent liability for the government.

“The company is still backed by the Ministry of Finance and the market will make the link to the government,” said Nizam Idris, head of foreign-exchange and fixed-income strategy at
Macquarie Bank in Singapore. 

“But it may not be a major driver because the beta from 1MDB noises has fallen to insignificant levels.”

Five-year credit-default swaps protecting Malaysia’s sovereign notes were at 81 basis points on Thursday, the lowest since September 2014, prices from CMAN show. 

The contracts have fallen more than half a percentage point this year. 1MDB’s 5.99 percent notes due 2022 were little changed at 108.65 to the dollar on Friday, according to prices compiled by Bloomberg. 

The yield has dropped about 55 basis points in 2017.

Debt Dispute

1MDB agreed to pay IPIC about $1.2 billion as settlement over a debt dispute, and said it would meet the obligations by selling investment fund units it owns. 

1MDB will also assume the
coupon and principal obligations for $3.5 billion of bonds that it had issued and were co-guaranteed by IPIC, according to an April statement.

1MDB’s President Arul Kanda declined to comment on the payment. The Malaysian finance ministry didn’t respond to an emailed request for comment.

Some 1MDB bond investors remain optimistic on the debt of the company that defaulted on some securities last year and which has been embroiled in global investigations into money laundering and embezzlement.

“We are still holders and not concerned,” said Lutz Roehmeyer, a money manager at Landesbank Berlin Investment.

“After all the noise last year, we are pretty sure that this is an internal fight that should not harm bondholders. So we expect full payment on our bonds on time.” – Bloomberg

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