1MDB's strange reaction

Assume you are running a company.

Not some small SME, but a huge one, with tens of billions of Ringgit of assets (and unfortunately, also a huge amount of debt). The company is owned by the people of Malaysia, and you really want to perform to your best ability for them, you definitely don't want to let them down.

You are doing your best, but things have not been easy, it is tough to meet the debt obligations.

And then ..... out of nowhere, a party contacts you, to tell you that they will soon send billions of Ringgit to you.

And, to your big surprise, they do this all for free, to help the people of Malaysia.

Added to that, they will even do their best to get other parties involved to send even more money (and those parties are indeed cooperating, as we speak).

How would you react, sounds too good to be true?

Basically that is what happened this week to 1MDB, I guess Christmas came early for the company and its management team.

And what was their reaction to the announcements of the above events?


1MDB notes a press conference led by the US Attorney General today relating to a civil court action filed by the government of the United States of America.

1MDB highlights that it is not a party to the civil suit, does not have any assets in the United States of America, nor has it benefited from the various transactions described in the civil suit.

Furthermore, 1MDB has not been contacted by the US Department of Justice or any other foreign agency in relation to their investigations.

As previously stated, 1MDB will fully cooperate with any foreign lawful authority, subject to international protocols governing such matters and the advice of the relevant domestic lawful authorities.


What an incredible strange and terse reaction. Four sentences, that is it, have they even bothered to read the filing?

The document is of course only an executive summary, only 136 pages long, but even then, there is so much detail, is this the best 1MDB can offer?

And are they not happy receiving back their money, do they not want to know what has happened, do they not want to see some justice being done?


"[1MDB] .... does not have any assets in the United States of America".

No, the assets are from people who allegedly stole money from 1MDB, and bought assets in the US with the proceeds. The US wants to freeze these assets and give them back to the right full owner, 1MDB.


".... nor has it benefited from the various transactions described in the civil suit."

Nowhere it is claimed that 1MDB has benefited from the transactions, in the contrary, dozens of examples are given that 1MDB allegedly has been conned from its precious money, estimated to be about RM 12,000,000,000.00.


This blog is more about capital markets, not many listed companies are mentioned in this case, but bonds are, and unfortunately not in a very positive way.

Malaysia has the ambition to become an important financial centre. The above cases (just a selection) seem to warrant scrutiny from the relevant authorities, why have they been so quiet regarding this case, surely this is not good for the Malaysian reputation?


The nice thing about these cases is that one can observe real conversations (either by phone or through email), like this one:

And to end this posting on a slightly more positive note, some Menglish is for ever added to the archives of the FBI):

Bonds: has the World gone mad?

First there was the news that the yield on the 50-year Swiss bonds has turned negative.

In plain English: you put your money away, and get 50 years later less money than you put in.

What happens in those 50 years, who knows? There might be a time of raging inflation, which means that the money at the end of the 50 years might be worth peanuts (literally).

It could also be that bond yields turn double digit, if one is forced to sell those bonds at that moment, good luck, a huge loss will be your result.


Now the news came out that Uber has issued a leveraged loan yielding only 5% interest per year. This company has never seen a profit in its existence (it is burning through billions of USD), something that is likely to continue for the foreseeable future.

Is that the new definition of "junk bonds"? Where are the times when junk bonds were yielding double digit interest rates, as they should, to compensate for the high risk of not getting back ones principle?


Central bankers who have caused the huge distortions might be euphoric about all these events. But do they really know what the future will bring, in what is probably the largest monetary experiment ever created?

The 10-year yield on the US Government bonds, the lowest ever:

Berkshire 200K, German 10 year bonds below 1%

CNBC reports:

"For the first time ever, a Class A share of Berkshire Hathaway will cost you more than $200,000. That's just one share for the price of a nice 6-bedroom, 4-bath house in Omaha."

While many companies use stock splits to keep their per-share price under $1000, or even below $100, Warren Buffett isn't a fan of that manuever because he thinks it encourages short-term trading rather than long-term ownership.

As a result, Berkshire's Class A has, by far, the largest dollar price per share for any stock trading in the U.S.

Bloomberg reports:


"Germany’s 10-year yields fell one basis point, or 0.01 percentage point, to 1.02 percent at 4:14 p.m. London time after touching 0.998 percent, the least since Bloomberg began tracking the data in 1989."

"Germany’s five-year rates dropped to an all-time low 0.203 percent while the two-year note yield reached minus 0.01 percent, the lowest level since May 2013. A negative yield means investors who hold a security until it matures will receive less than they paid to buy it."


We live in strange times. The global central banks (FED and the like) can be satisfied.

But what negative effects will all this have in the long run? Yield hungry investors are searching for some returns above the meagre interest rates they receive on their fixed deposits, creators of pyramid (and other fraudulent) schemes are having a great time, their business is booming.

Bond fever grips Singapore's rich

Article in The Edge.

Surely this has to end badly one day, in my humble opinion. Investors in these bonds do not get properly compensated for the relatively high risk that they take. All thanks to people like Greenspan and Bernanke.


(July 11): Private banks are driving Singapore's bond market to new heights as wealthy individuals clamour for higher returns. Pacific International, a highly leveraged, unlisted shipping company, this week became the latest new issuer to benefit from this apparently insatiable appetite, when it sold a S$300m (US$240.8m) 5.90% unrated three-year bond that attracted S$3.5bn of orders from 93 different buyers. Pacific already has US$2.95bn of debt and an annual interest bill of around US$81m. Despite a weak outlook for the competitive shipping industry, private banks acting on behalf of their clients bought 93% of the deal. 

This was by no means the only bond to have drawn a crowd in recent weeks. Smaller listed companies have also pulled in big oversubscriptions. A S$75m 4.75% 3.5-year issue from construction company Tiong Seng Holdings received S$650m of orders, while property developer Singhaiyi Group pulled in S$800m for a debut S$100m 2.5-year at a 5.25% yield. Surging appetite for yield is allowing more companies to come to the capital markets, giving some in difficult sectors such as Pacific International additional flexibility compared to bank loans. While the additional demand adds to market liquidity, however, market participants worry that inflated order books may be distorting pricing and leading to a build-up of credit risk. "The private bank clients are adamant about getting their hands on the bonds because they know how hard it is to pick them up in the secondary markets," said a debt syndicate banker."The PBs (private banks) inflate their orders to ensure they get at least 10% of those orders, and that just balloons the entire book. Once you see a deal that is more than three times oversubscribed, you can be sure the rest is inflated."A giant order book typically allows a company to push for a reduced cost of funding. Pacific International, for example, squeezed the final yield on its bond by 35bp to 5.90%, a considerable saving.

Few alternatives
High-net worth individuals are turning to high-yield bonds after a choppy period for the city's stock market and government restrictions that have curbed speculative property investments. Cash rates are low, and the yield on the 10-year Singapore government bond is only 2.3%. "Yields are very low and cash returns are next to nothing," said a Singapore-based debt syndicate banker. "Investors have to re-channel funds somewhere, and they pick high-yield bonds as the returns can sometimes match up to equity dividend yields.

Landmark case against Mayban Trustee and Kaf Discounts

This is a very interesting landmark case against an independent adviser and trustee in a bond deal gone wrong, Mayban Trustee and Kaf Discounts are severely punished. Kaf's prospecutus was deemed to be "false and misleading" and "had toyed with the truth", Mayban Trustee had not shown "the required degree of care and diligence".

For some reason, the case has not been highlighted in the local media.

This bags the question, why are independent advisers of deals on the Bursa Malaysia not punished? I have seen so many strange cases with independent advice that was not unbiased at all, leaving out lots of important information and considerations. Some of the independent reports I have written about (the first being by far the worst prospectus I have ever seen):

http://cgmalaysia.blogspot.com/2011/09/muib-and-pmcorp-horrible-deal-from-past.html
http://cgmalaysia.blogspot.com/2011/09/maybulkposh-kpmgs-independent-advice.html
http://cgmalaysia.blogspot.com/search/label/MMC

In the below case regarding the bond deal, the plaintiffs were financial institutions, having a level of knowledge that is much higher than what can be expected (in all reason) from the average minority shareholders. And still they were proven right by the judges that indeed they should be able to rely on the independent advice.

Do minority shareholders really have to go all the way and sue the independent advisers, following the path of the financial institutions? Surely the authorities (most notably the Securities Commission and Bursa Malaysia) should take fast and stern action and minority shareholders should not need to have to go to court.

Unfortunately, I haven't noticed a single case against an independent adviser, related to corporate exercises of companies listed on the Bursa Malaysia.


From The Business Times (Singapore), November 21, 2011

by S. Jayasankaran

Warning for independent advisers in bond deals

Malaysia's appellate court has unanimously affirmed a landmark decision by the High Court that will radically raise the bar on standards governing private debt issues in Malaysia.

Last year, Justice Mary Lim had ruled that the lead arranger and the trustee of a bond deal gone awry were just as liable as the issuer for any losses suffered by bondholders.

To recapitulate, 10 Malaysian financial institutions had filed a RM 149 million lawsuit against prominent defence contractor Rafie Sain in 2005 over bonds issued by his company that had defaulted. The decision took so long because of various actions and counter-claims brought by the warring parties.

But the suit was unprecedented in that it also named the deal's independent advisers as defendants. They included Mayban Trustee, a unit of the country's largest bank, and Kaf Discounts, which acted as the transaction's lead arranger and financial adviser.

The 10 institutions - which included CIMB, Malaysia's largest investment bank - were holders of RM 140 million worth of bonds issued in 2004 by Pesaka Astana, a private company owned by Mr. Rafie. Pesaka defaulted on its debt in September 2005. In 2008, however, Mr. Rafie and his company entered into a consent judgment in favour of the plaintiffs. For their part, Mayban and Kaf opted to go to trial.

Pesaka, a builder of heavy-duty vehicles for the Ministry of Defence, had raised RM 140 million through Islamic debt securities in April 2004. The bonds were wholly taken up by the 10 institutions in varying amounts.

At the core of the plaintiffs' arguments was the notion that they had gone into the deal on the basis of an information memorandum - a prospectus by any other name - prepared by Kaf that was essentially "false and misleading". Among others things, the suit also contended that Mayban failed to exercise the necessary care and due diligence expected of a trustee.

Both Justice Lim and the three appellate judges agreed with this argument, saying that the 10 had depended on the informed information memorandum to "make informed investment decisions".

Indeed, the appellate judgment - released over two weeks ago but unnoticed by the local media - was even more scathing than the High Court's.

Writing for the Court of Appeal, Justice Jeffrey Tan said that the information memorandum "had toyed with the truth" and concluded that Mayban Trustee had not shown "the required degree of care and diligence and so should also answer to the bondholders for those false and misleading statements".

In summary, the appellate court dismissed both Kaf's and Mayban's appeals and ordered them to pay the bondholders RM 149.3 million. To add insult to injury, the court also tacked on compensation of 3 per cent a year dating back to the time the bonds defaulted. Justice Lim had been kinder. The bondholders had sought interest at 8 per cent from the day the bonds defaulted. Justice Lim disagreed saying that "such interest is riba and not allowed by sharia".

The case raises at least two important issues.

One, it underscores a newly found ruthlessness in Malaysian financial litigation as at least two of the litigants on both sides of the suit are government-linked companies. Maybank and CIMB are both majority state-owned and might have resorted to quiet and state-brokered, mediation in less competitive times.

More importantly, however, the two judgments will have warning overtones for all intermediaries and advisers in future debt transactions.

As Justice Lim had said in her original judgment, it "will send a chilling message to the bond industry". In short, independent advisers will have to be just that - independent and professional.

What is wrong with good old fashioned bonds?

I don't agree with the below article in The Edge Financial Daily. The ICSLS of E&O are irredeemable, in other words can not be converted back to cash, the holder has no choice. But if they always convert to shares then somebody who wants to value the company should calculate the number of shares on an "as converted" basis, in other words with the shares being diluted. There is a difference in some matters like voting at AGM's (an ICSLS does not count as a share), liquidation events (ICSLS often have preference at liquidation events), but that does not matter in the normal cause of action.

Instead of these difficult instruments that are often misunderstood, why are companies not just issuing plain bonds? Are they not sexy enough? There was a time when they were quite normal on the Bursa Malaysia. What has happened, why are they not used anymore?

I am of the opinion that the share market can perfectly well operate with:

• Shares: investors invest money in the company for a piece of the company, and will receive back dividends when declared;
• Bonds: investors loan money to the company, they don't get a piece of the company, but they will receive a fixed interest rate and at the maturity date they receive back their money.

Shares appeal more for the risk seekers who are looking for capital appreciation and/or dividends. Bonds appear to risk averse people, like pensioners, who want stable income.

There is no need for difficult instruments like Irredeemable or Redeemable Loan Stocks, Warrants, Options and what do you have.

E&O could have just issued plain old bonds, at such a interest rate that it was enough attractive for investors to buy them, without causing any dillution for the shareholders. Of was this a too simple solution for the corporate advisors, would they receive lower fees for such a solution?


http://www.theedgemalaysia.com/highlights/196425-simes-eao-premium-to-rise.html

Sime Darby Bhd’s already expensive acquisition of Eastern & Oriental Bhd’s (E&O) shares could look even more pricey after the surprise announcement last night that the latter will be converting an estimated 220.11 million loan stocks into ordinary shares before year-end.

E&O announced on Bursa Malaysia yesterday that it will be converting all its remaining 10-year 8% irredeemable convertible loan stocks (ICSLS) issued in 2009 to new ordinary stock units of RM1 each on Dec 27. The number of oustanding ICSLS was not indicated, but totalled 220.11 million as at June 30, 2011.

When the 220.11 million shares enter the market at the end of the year, the resulting dilution in book value per share coupled with a potentially large share overhang could well make Sime Darby’s RM766 million stake in E&O come at a greater premium as the price-to-book value of its acquisition rises and the share price falls.

To recap, Sime Darby had bought 273 million ordinary shares and 60 million ICSLS from three vendors — E&O managing director Datuk Terry Tham, Tan Sri Wan Azmi Hamzah and GK Goh Holdings of Singapore at a 60% premium to the market price, or RM2.30 per share.

Issued in 2009 as part of a fundraising exercise, the ICSLS are due only in 2019. However, E&O said that based on conditions stipulated in the Trust Deed dated Sept 11, 2009, the company is exercising its rights of mandatory conversion, and the early conversion shall be on Dec 27 at 5pm.

E&O may convert the ICSLS at any time after the second anniversary of the issuance with the sole condition being that its three-month volume weighted average price (VWAP) exceeds RM1 preceding the exercise.

The three-month VWAP as at Nov 17 was RM1.52, skewed upwards by the jump in price following Sime Darby’s acquisition.

The ICSLS have a conversion price of RM1 per E&O share. As they were issued at 65 sen, the remaining 35 sen will be debited from the company’s share premium account.

Based on E&O’s June 30 balance sheet, there were 908.90 million E&O ordinary shares issued. The conversion of the ICSLS will increase that figure by 24.2% to 1.129 billion shares, according to estimates by The Edge Financial Daily.

However, given that Sime Darby also holds 60 million ICSLS, the conversion will not materially dilute Sime Darby’s 30.04% stake in E&O, which will fall slightly to 29.49%.

Sime Darby should not be adversely affected as it had the foresight to acquire the 60 million ICSLS to ensure it would continue holding close to 30% of E&O. Otherwise, its stake would have been diluted to 24.18%, according to The Edge Financial Daily’s estimates.

An analyst estimated, based on “back of the envelope calculations” that resulting from the conversion, E&O’s book value per share will fall to RM1.06 from RM1.24 at the time of Sime Darby’s acquisition.

This is because, while the number of ordinary shares has increased by 24%, total equity will increase by only 4% to roughly RM1.2 billion due to RM71.61 million of the ICSLS located in non-current liabilities being transferred to shareholders funds, he said.

Another RM60.66 million in ICSLS is already parked under shareholders’ funds. The conversion of this tranche would not increase total shareholders’ funds.

On the other hand, earnings per share will remain mostly unaffected, only dipping to 4.77 sen  from 4.8 sen for the quarter ended June 30, due to the high 8% coupon rate attached to the ICSLS.

Tham held about 65 million ICSLS as at July 29, but that figure should be much lower as he and the other vendors sold their ICSLS to Sime Darby.

When the ICSLS are converted at year-end, there will be over 160 million shares flooding the market excluding Sime Darby’s 60 million ICSLS. The resulting overhang could further depress E&O’s share price and exacerbate Sime Darby’s paper losses.

Furthermore, the flood of liquidity coupled with depressed market price could provoke another entity to acquire a significant stake in E&O.

The second largest shareholder with a 6.3% stake, ECM Libra had attempted, but failed, to nominate two directors to the board of E&O on Sept 30.

E&O ended down one sen to RM1.41 yesterday with 1.06 million shares traded. Year to date, the stock has risen by 6.82% from RM1.21.

This article appeared in The Edge Financial Daily, November 18, 2011.