This writing is Part 3, which focuses on the IPIC vs 1MDB saga. From this part we could learn how “big deals are done and conceived”, and how it could go wrong.
Much attention of Malaysian had been focused on 1MDB, but less attention had been made on IPIC itself. For that matter who are they?
IPIC is a major holding company based in Abu Dhabi; it was established by the government of Abu Dhabi in 1984. The Chairman of IPIC is Sheikh Mansour bin Zayed Al Nahyan, younger brother of H.H. General Sheikh Muhammad bin Zayed Al Nahyan (the deputy ruler and crown prince of Abu Dhabi. Sheikh Mansour is also the owner of Manchester City, and spates of other investments, such as shares in Mercedes Benz and few other high profile assets. IPIC today is a major holding of oil and gas, energy, and real estate. Among them is CEPSA (100% owned), among the biggest Spanish oil conglomerate based in Madrid; COSMO Oil (20% owned) of Japan, and many others. One of the subsidiary is Aabar Investments Public Joint Stock (PJS), which is in financial and real estate investments. The total net assets of IPIC is about USD17 billion, with annual turnover of over USD1.5 trillion.
Khadim Al Qubaisi, used to be the CEO of IPIC and Chairman of Aabar, and Mohamed Al Husseiny, used to be the CEO of Aabar Investments PJS. At one time, Al Qubaisi was one of the rising young star of Abu Dhabi; and he was quite well known within the power circle of Abu Dhabi. Al Qubaisi family is a sub-tribe of the Bani Yas, which is the main tribe of Abu Dhabi, of which the ruling Al Nahyan family comes from. Many of the Al Qubaisi hold high government posts in the Abu Dhabi government. The family has a good name and reputation within Abu Dhabi and the UAE. Mohamed Al Husseiny is a Kenyan American, who came to Abu Dhabi as an executive, and later on to rise up as Aabar CEO.
The deal with 1MDB started through a connector by the name of Jho low, who started his business with one named Yousef Al Otaiba, who is now the UAE Ambassador to the United States; who came from a very well known family, as one of the Otaiba, Mohamed Al Otaiba was the founder of Abu Dhabi National Oil Company (ADNOC). Through this connection, Jho Low got into the closed circle of “young emiratis”, and through which he managed to get into their personal relations. And thus starts this so-called Malaysian Abu Dhabi relations.And Jho Low’s modus operandi is to join them in the “party circles” – by partying with them, and possibly by paying for the party bills.
And on the other hand, to claim his credibility, Jho Low has to add the Malaysian into the circle of power, and hence Riza Aziz is brought in at some stage or another. Anyway, all started together when they were at sometime university mates and party mates. Through this, 1MDB and IPIC saga was born into. The “cash rich” Abu Dhabi, combined with the “political clout” of few young Malaysian guys and young Abu Dhabi guys. All with full ambitions of the life of richness and wealth. The plans (if any) were made within the dance halls of some night clubs somewhere; and not any board rooms or meeting rooms as most were done. And they need to strike the first deal; and the deal has to be sweet and clean.
The deal was to get Abu Dhabi to own shares in some of the Malaysian bank; and during the time Goldman Sachs (through their Singapore office) were advising the rich and famous of Asia, which includes the Sarawak CMS (Abdul Rahman Taib), which at the time owned significant stakes in RHB Bank. CMS was told to sell the shares, and somehow, Jho Low managed to get to them through Goldman Sachs, through one guy by the name of Roger Ng (a Malaysian), who had just joined Goldman from Deutsche Bank Malaysia. Roger has to leave Deutsche after a major debacle at the bank during the bond market fallout prior to that. Jho Low and Roger then carved the deal for CMS to sell the shares to Abu Dhabi Commercial Bank (ADCB). The deal was clean, ADCB got a good stake for a good price; CMS could exit honorably, and Roger Ng claimed his first major strike for Goldman and established Goldman’s clout in Sarawak’s elite, and Jho Low proved to his Abu Dhabi counterpart, he is a deal maker. And thus the team could move on to bigger targets.Note that Roger’s boss at Goldman is the famous (Dr.) Tim Leissner.
Then came the opportunity of restructuring Terengganu Investment Authority, which was the vehicle for Wang Ihsan (oil royalty payments) from the Malaysian federal government to the State of Terengganu. TIA as it is knowned, was before that “controlled” by Patrick Lim “Badawi”, as he was called, who get to managed to spend the royalty monies of TIA for some projects like the now defunct “Monsoon Cup” regatta, the Crystal mosque, and so on. TIA is a perfect vehicle since it was chartered for some special purposes, which needs no new cabinet or government decision. Wang Ehsan had been abolished after BN took back Terengganu from PAS. So TIA is a perfect vehicle for new ventures, and thus the 1MDB idea was born, riding on the 1Malaysia idea of the new Prime Minister, YAB Dato’ Sri Najib.
The idea for 1MDB is to create a Leverage Buyout (LBO) entity, since it is a clean vehicle, and it is 100% Malaysian Government owned. LBO is an old idea that started with Mike Milken of the famous “junk bonds” famous scandal in the US involving Drexel Burnham Lambert (his firm) and other names such as KKR and others,which during the 80’s rule the US financial world. Note that LBO is always linked to bond issuance, which is exactly what 1MDB had done. Roger Ng, in Goldman had been all along a capital market guy (which means origination and issuance of bonds). Before his departure from Deustche Bank, Roger is one of those who participated in the Special Ports Vehicle “SPV” Bond (via Deutsche Bank Malaysia) where the Bank took almost RM500 million of the bond. This is a bond that was rated “AAA” due to only one letter from the Malaysian Government to provide undertaking or letter of support. The bond since had gone bonkers, and for that Tun Lin Liong Sik was charged in court, purportedly that the letter issued was not approved by the cabinet. Tun Dr. Mahathir came to his rescue by confirming that it was otherwise (and that save Tun Ling from prison).
All that 1MDB need is to be able to raise debts via bonds issuance, which could get good ratings. On this issue, the best way is to get the Abu Dhabi’s party to issue the guarantee, of which they get IPIC due to it’s financial stature, and Aabar, as IPIC’s financial subsidiary to be involved. Anyway, the deal is such that it would be an “off balance sheet” items for IPIC, because the guarantee was further backed by a counter guarantee by the Malaysian Government through a “letter of comfort” that was signed by the Malaysian government. And thus, through Goldman’s connection, given its vast network of financial intermediaries, the bond was issued rather on a very quick speed. It wasn’t issued in Malaysia, but in London, hence no Malaysian regulators were involved; and the issuance was in US Dollar denominations. I am also wasn’t sure of the ratings that were given, but could be understood that it should have the same ratings as IPIC’s own bonds that were also issued in London. So far, everything is fine and good in accordance to normal finance “playbook”. One thing that I need to note is who are the “subscribers and investors in 1MDB” bonds – which is not clearly known until now. And how would they fare as the 1MDB vs IPIC saga continued is also unknown.
Off course in the bond offering documents 1MDB stated that it would emulate IPIC’s play, namely to get into the energy business as well as oil and gas business. That makes a lot of sense, since during that time, after the 2008 period of sky rocketing oil and energy prices – it seems that it is a well positioned play. And thus the 1MDB Energy (now Edra Energy) was born, and the PetroSaudi venture was hatched. Similarly, Aabar being a real estate and financial entity, the TRX and Bandar 1Malaysia would be a good match. Again, all are well within the normal financial market playbook. As an LBO player, 1MDB need to get in quick, pack the deals, and flog them off again, usually with a public listing or other modes of shares issuance, to pay off the bonds, and gained handsomely, with little or almost none of Malaysian government cash monies. This is right from Mike Milken’s playbook of LBO. 1MDB Energy could be floated (again, with the help of Goldman, hopefully) in some markets like Hong Kong or London, and based on the calculations, with Price Earnings ratio of say 6 to 8, 1MDB will be able to pay off a large portion of the debt and will able to gain possibly a few billions net amount on top of that. But then something went wrong, that the play makers didn’t expect – the energy prices (i.e. oil price nose dived). 1MDB Energy floatation deal can’t take off as the numbers had changed; and there were so many other complications at the IPP levels that needed to be amended in order to get these numbers. The listing deal has to be aborted.
Furthermore, the real estate deals, namely TRX and Bandar 1Malaysia are far from its target in terms of progress and development; hence value as being planned on paper (upon bond issuance) are far from being realized. And furthermore, the PetroSaudi deal, as it stood was not any deal of Petroleum after all. This is when the trouble for 1MDB started. They ran short of cash, and has to called upon Malaysian entities to give them the lifeline – namely KWAP, Tabung Haji etc.
From here on the rest of information are pretty much in the public knowledge; which I do not want to go into details, since so many sensitivities and issues involved. I only went into the historical part, since many are not aware of such developments. Now let us focus on the issue of 1MDB vs. IPIC, which is the main issue that I would like to address here.
First, we need to address the bonds issued by 1MDB: they are two Islamic bonds totaling RM7.4 billion (or $1.9 billion), there is RM800 million from KWAP, $1.75 billion issued privately via Goldman in 2012, and similarly another $3 billion issued privately via Goldman in 2013. The bonds issued were guaranteed by IPIC (total guarantee exposure of about US6.5 billion). Now, as of April this year, all the bonds are already in default or cross default. And the terms of the bonds are that the investors could now ask for redemption to the bonds at anytime after event of defaults occur. Naturally, 1MDB then seek IPIC to make good on their guarantee, which now IPIC has disputed, since the fees for those guarantees were claimed by IPIC to had never been paid to them (amounting to $1.3 billion, aprox.).
1MDB claimed that it had made good on the guarantee fees payment to Aabar Investments BVI, and IPIC claimed that Aabar BVI doesn’t belongs to IPIC – hence point of disputes started. Part of the bond offering would have some arbitration clause – which now IPIC had, in April invoked upon, and therefore, it will be heard by a 3 panel member tribunal in London Arbitration Center.
First question, why there were such “large fees”payments for a bond totaling $6.5 billion (against $1.3 billion)? The guarantee was in some form of Put/Call structure, whereby 1MDB could Put upon IPIC to buy 1MDB Energy assets at a “high fixed price”, against IPIC could also call those assets at another price. it was a convoluted structure, not meant to be exercised, but to give the forms of guarantees for the bonds. Now, both sides could not exercise this Put or Call as they are in disputes. IPIC will reject any Put from 1MDB since the fees was claimed not paid, and in now way they would Call the assets (as the price were inflated purposely then). In another word, IPIC would like to get out of the deal, and possibly to cancel the guarantee (hence of the hook of the $6.5 billion guarantee), and be totally free from 1MDB. This is the logical course of action. Anyway, what financial benefit could they get out of this deal? I am sure in the arbitration documents (which is not yet public), IPIC would claim that the guarantees are invalid (and off course 1MDB would claim otherwise). So now, we have a full scale tussle between two so-called sovereign wealth funds, and how it turn out will be something of interest to see.
What would be 1MDB’s defense in its claims? That whatever they do, is at the request and behest of officers of IPIC (who are deemed to have full authority to sign) namely Khadem Al Qubaisi as CEO of IPIC and Chairman of Aabar, and Al Husseiny as CEO of Aabar. Therefore, even if the payment went to Aabar Investments BVI (which is now clearly not linked to Aabar Investment PJS (Abu Dhabi), 1MDB had already made good of the obligations. And if the monies went from Aabar BVI to somewhere else is beyond 1MDB’s control.
For all these reasons, IPIC has to go after it’s former officers – and hence Abu Dhabi had clamped upon Al Qubaisi and Al Husseiny. For that matter, IPIC has to file proper complaints within certain courts that certain misdeeds were done by these two – otherwise they concede that their past actions were in fact condoned. This will weaken their position in the arbitration case. And for that matter, officials from 1MDB must also be linked in to show and prove that 1MDB’s officers were also part of the scam. This would be the natural position of IPIC in order to strengthen its claim in the disputes.
And thus, my suspicion is, the current US DOJ actions, could well be triggered by complaints from IPIC of Abu Dhabi to the US Government, and knowing very well that Abu Dhabi and the US Government are in close links due to the oil (whereby almost 4 million barrels per day sent to the US),and the size of Abu Dhabi investments in the US could well reach US trillion dollars. Protecting Abu Dhabi carries far more weight than protecting 1MDB and Malaysia. This action by DOJ, to seize the assets follows similar pattern of seizing and freezing the assets of Al Qubaisi and Al Husseiny, which were instituted by Abu Dhabi in April this year.
Please don’t be surprised if IPIC would lay claims on those assets seized by the US (in particular whatever related to Al Qubaisi and Al Husseiny) to be returned to them, if Malaysia do not lay its claim on it first. For IPIC, naturally, money first, brotherly arrangements later. Anyway, they are keen to get at the money that they “had lost” first, then negotiate later. That would be an astute and correct legal strategy on their part.
Lastly, I would like to comment a bit on the political fall out in Malaysia. I would like to say to both sides of the divide:
- This whole 1MDB saga and its relation to IPIC saga, is actually an affair that begins as something that had nothing to do with the US. Whatever your views on the US (as savior or as evil power), actually falls short on looking at our own shortcomings – Malaysia and Abu Dhabi alike. We did allow, conveniently for the US to come in into the picture. One, by dealing with US Dollars, and secondly by our people moving whatever of these monies (rightly or wrongly) to the United States as investments, etc. So why to blame the United States for our own stupidities?
- Malaysia is too small for the US to be bothered with economically. We have no clear leverage and clout to influence the US economy in whichever way we could. We are not part of the main foreign policies. Indonesia is even bigger than Malaysia for them. So when anyone from UMNO trying to say that US is trying to sabotage Malaysia, and for the opposition to begin their praise for the US “rule of laws”, then we are all as equally wronged. We would be nothing more than two ruling Rajas of Perak asking the British to intervene how Perak should be ruled, which ends up with the Pangkor Treaty and the beginning of English colonization of Malaya.
- We always looks very high upon such names as Goldman Sachs, Deutsche Bank, etc., whereas these are the most notorious culprits of “shadow banking”- which are among the biggest agent for the last global financial crisis of 2008/2009. And yet, we have the tendency to fall back to them. The reliance of 1MDB, IPIC etc., on Goldman and alike, has always means trouble. They are not bankers. In fact Goldman is not even a bank by any means. They are “deal makers”. If you check, not even a single dollar of the bonds issued by 1MDB is held by Goldman. So what kind of banker are they? Why should we rely on external people, whereas our own bond market is well developed and our financial markets are quite well equipped to undertake such size of bond issuance, in Ringgit currency (and not US Dollar)? Didn’t we learn from the 1998 financial crisis to avoid and shun foreign currency issuance for domestic assets? What had happened to our securities (the SC) and financial (Bank Negara) regulators? Have we forget the past and what we had learnt?
- Lastly, what we need to watch are the bondholders of 1MDB bonds. Who are they? Very likely they are hedge funds, who are willing to take such bonds (given 8.5% or so returns/ coupon rates), and who could then use it as tools for Ringgit speculations. So what, we might have done is to “open the doors” again for currency speculators, which saw Ringgit to plummet to 4.5 per dollar, a repeat of 1998 crisis?
I am not so keen on the political debate that’s on going – which I saw most missed the point in their fervor to attack or to defend – that is the real economic effects and significance of the issues. For whatever had happened, we as a society collectively are responsible, since we allow such financial transactions to take place. We should not condone such practices, and we could not close our eyes for such thing to happen.
As I would say, if we look at muddy rivers, we cannot simply look upon the river without looking at where the source of those mud come from – it came all the way from the smallest of the rivers way up on the stream. We are those small rivers that contribute to the mud, by cutting every trees in our way. Everyone is contributing to the cutting of the trees, some by one tree, others by the dozen, and others by the hundreds. We always like to blame on the others and not realizing that we are part of the problem rather than the solution. And yet, we called upon someone to be removed – to be replaced with what? God place upon people or society a leader that befits them.It reflect our own self and our own lot. And mind me, the rot had started long time ago during Tun Dr. Mahathir. The others after him are acting from the same play book that was written by him. So who to blame, since we never learn from the past.