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Friday, May 22, 2015

Watts up!

Watts up!

A deepening financial crisis at 1Malaysia Development Bhd (1MDB), the debt-laden sovereign fund that has been mired in scandal, appears to be pushing Prime Minister Najib Razak’s embattled administration down the road of power-sector reform in the search for a solution.
Faced with a huge build-up in crippling interest payments on the fund’s US$12 billion debt load, the Malaysian government has resolved to push ahead with a full-blown bailout.
Financial executives familiar with the situation say that Najib’s administration is leaning towards an arrangement that will call for the national power company, Tenaga Nasional Bhd, to take over 1MDB’s power generation assets – currently grouped in a private entity called Edra Global Power – in a deal that could be worth as much as RM16 billion (US$4.4 billion).
And to blunt criticism that public money is being used to rescue the state-owned company, the government is considering a plan to wrap the salvage operation around a sweeping overhaul of the national power sector that has long been a source of patronage for the country’s political and business elite.
The buyout will be followed by a proposal calling for the unbundling of Tenaga’s business into three separate entities that will individually house the utility’s power generation, transmission and distribution divisions.
The plan is expected to be tabled for discussion by the Cabinet next month.
Proponents of the plan say that the takeover of 1MDB’s power assets, which will add nearly 5.6 gigawatts of generating capacity to Tenaga’s portfolio of power plants, will lay the foundation for a so-called cost-based pool power system, where power producers sell electricity to a central exchange that determines a transparent national pricing structure for electricity tariffs.
“The government needs to come to 1MDB’s rescue, and throwing a power sector review into the mix may make it more palatable,” says a chief executive of a foreign bank, who has tracked Malaysia’s power sector and 1MDB’s troubles.
But getting the plan off the ground won’t be easy.
Najib must first overcome the politics of this complex rescue plan and tame powerful vested interests such as the country’s well-connected independent power producers and Tenaga’s change-resistant management.
1MDB has become the single most toxic political problem facing the government and its deepening debt crisis is now the focal point of a national campaign led by former prime minister Mahathir Mohamad to remove Najib from office.
The fund was established in April 2009 to pursue strategic international investments, but is now scrambling to service a debt load that has ballooned to over RM46 billion (US$12.7 billion) due to the paltry cash flows generated by its assets. These are largely made up of power-generation plants and parcels of real estate acquired from the government at steep discounts to their market value.
The bill to service 1MDB’s debt stands at a whopping US$64.1 million a month and the fund has paid out more than US$2.2 billion in interest charges on loans since it began operations.
If it were to default on any of its multiple loans, it would trigger cross-default clauses in loan agreements with other creditors. The Malaysian government would then be forced to honour about US$6.5 billion owed to international and local financial institutions, bankers and government officials say.
A strategic review is ongoing, and 1MDB’s bankers say that the debt resolution will be dealt with in two parts; borrowings associated to the power assets, and group debt that can be assigned to 1MDB’s potentially lucrative real estate.
Debt rescheduling negotiations are already under way. Government officials and bankers say that 1MDB is currently planning to reschedule close to US$4.5 billion in loans with a consortium of state-owned financial institutions in Abu Dhabi and Saudi Arabia.
The government’s immediate goal is to resolve the debt associated with 1MDB’s power assets. An original plan for an initial public offering (IPO) of its shares has met resistance, say bankers, because poor investor appetite for Malaysian offerings suggest that 1MDB wouldn’t raise the targeted US$3 billion.
1MDB is also against an IPO because it would have to offer for sale close to 80 per cent of its equity in Edra to raise enough capital to retire the bulk of the estimated US$4.4 billion debt that is tied to its power assets.
“The prospect that private entities, including foreigners, could own such a large portion of a strategic national asset will become another political problem,” says the chief executive of a state-owned financial institution that is closely watching developments at 1MDB.
It is against this backdrop that the Najib administration is considering the plan to have Tenaga take over Edra’s assets then launch a revamp of the country’s power sector.
To be sure, the energy sector needs an overhaul.
Plans to liberalise the market began after a nationwide blackout in 1996 gave Mahathir’s government enough clout to break Tenaga’s monopoly and introduce private players to the power generation sector.
But that move quickly morphed into a tool of patronage that benefitted politically well-connected business groups, who were awarded lucrative long-term concessions to supply power to Tenaga at above-market rates.
Before 1MDB’s multi-billion-dollar acquisition of three power assets from independent power producers, over 40 per cent of the country’s electricity output was generated by private entities, leaving the government with little room to push for reform.
But with the bulk of Malaysia’s generation capacity back under government control, the government is considered to be better positioned to proceed with reforms.
Industry executives and government officials pushing for power sector overhauls say that the unbundling of Tenaga’s generation, transmission and distribution division would allow the government to unlock value in the national utility by spinning off these entities with listings on the stock market.
But such a corporate reorganisation could easily take two years or more.
For now, the government’s focus is on unloading 1MDB’s power assets to Tenaga and that will boil down to pricing. Tenaga is thought to have valued Edra at about RM13 billion, but 1MDB’s top management has valued its power assets at about RM17 billion.
Reconciling that difference is set to be the government’s next big headache.
- theedge

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