This article first appeared in The Edge Malaysia Weekly, on January 4 - January 10, 2016.

INSTEAD of celebrating the New Year, 1Malaysia Development Bhd’s (1MDB) president and group CEO Arul Kanda Kandasamy will spend the long weekend figuring out how to spend the 10% deposit of RM741 million the investment fund will receive soon from the sale of 60% equity interest in Bandar Malaysia Sdn Bhd.

“I think it is a nice position to be in, given the challenges we have faced in the course of this year,” says Arul when asked about his plans for the RM741 million at a press conference after the signing of the sale and purchase agreement with the buyer, a consortium led by Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (M) Sdn Bhd (CREC).

“I am going to take the weekend to think about that [how 1MDB will use the funds],” he told the press light-heartedly.

His relief is palpable.

In just one year, Arul has planned and executed the rationalisation plan. For that, the 39-year-old deserves a pat on the back.

Just like the sale of land in Tun Razak Exchange (TRX), the Bandar Malaysia transaction is undoubtedly a successful one if viewed in isolation. With a book value of only RM4.2 billion, the sale will easily create over RM8.15 billion in value for 1MDB overnight. The problem, however, is whether the gains on the sale of national assets will make their way back to the national coffers since 1MDB is wholly owned by Ministry of Finance (see “What could have been” on Page 49).

Realistically, given 1MDB’s massive borrowings, what Arul probably needs to figure out over the weekend is which debt payment is due soon and how much cash will be required. In a nutshell, the RM741 million cash would come in handy to service 1MDB’s debt.

1MDB’s borrowings are estimated to be RM48.36 billion. As part of the rationalisation plan, however, Arul has monetised an estimated RM19.94 billion worth of 1MDB’s assets — including the sale of the TRX parcels and power assets (see infographics on Page 48). 1MDB will also shed an estimated RM9.2 billion in debt via the disposals and deconsolidation.

On top of that, the debt-for-asset swap with Abu Dhabi’s International Petroleum Investment Company (IPIC) has also reduced 1MDB’s debts by US$1 billion, and may further reduce it by US$3.5 billion.

“This is the final stage of our rationalisation process, which was approved by the Cabinet in May. We managed to complete the rationalisation plan as we outlined it — within six months,” Arul told the press.

The RM7.41 billion deal is one of the largest property transactions in the country to date in terms of value. The 486-acre Bandar Malaysia tract in Sungai Besi, currently home to the air force, has been valued at RM12.35 billion, or RM583.37 psf.

The price tag does not appear to be expensive as Bandar Malaysia will involve various transportation projects such as Mass Rapid Transit Line 2, the proposed KL-Singapore High Speed Rail line, the Express Rail Link (which connects to KLIA), as well as a highway, Duta-Ulu Klang Expressway Phase 3.

However, the land comes with encumbrances such as a RM2.4 billion sukuk and relocation cost for the air force base (see “Did IWH-CREC consortium get a good deal?” on Page 49).

It is worth noting that Malaysians will still retain control of 76% of Bandar Malaysia. IWH is a 60:40 joint venture between Johor government-owned company Kumpulan Prasarana Rakyat Johor Sdn Bhd and Credence Resources Sdn Bhd. IWH is best known for developing much of the Iskandar region in Johor, where it owns 4,300 acres. Credence Resources is 90%-owned by Tan Sri Lim Kang Hoo. Lim Keng Cheng, managing director of Ekovest Bhd, and Lim Hoe hold 5% each.

CREC is the Malaysian arm of China Railway Group Ltd, the largest construction company in China. It has built much of China’s railway system.

To date, 1MDB’s rationalisation plan will help cover most of its debt, assuming the bulk of the proceeds from the disposal is channelled into debt-settlement.

1MDB has a few assets left — 234 acres in Air Itam, Penang, and 318 acres in Pulau Indah, Port Klang. On top of that, it has the remaining 40% stake in Bandar Malaysia, and some land in TRX.

Interestingly, 1MDB may not completely dispose of all its assets as originally planned. According to Arul, it may retain the 40% stake in Bandar Malaysia instead of transferring it to the government. As part of the rationalisation plan, 1MDB was supposed to inject its assets into standalone vehicles that could be disposed of.

“Right now, it is an option for the government to take over 1MDB’s stake in Bandar Malaysia. It is something that will have to be discussed,” says Arul.

However, 1MDB isn’t quite in the clear just yet. The sale of the land, which was acquired at a low cost, might make easy money, but 1MDB’s rationalisation plan hinges on its ability to execute the debt-for-asset swap with IPIC.

The transaction will see IPIC assume the obligations for the US$3.5 billion bond principal and interest, which was raised by Goldman Sachs, and is currently held by 1MDB. As consideration for assuming the obligations, 1MDB will also transfer to IPIC the company’s US dollar-denominated cash deposits as well as its US-dollar funds that are currently parked in Singapore.

Hence, the swap will depend heavily on the value of 1MDB’s funds and assets, which have been vaguely defined. After all, if the assets had that sort of intrinsic value, 1MDB could simply dispose of them today to service and settle the debt.

There is no such thing as a free lunch, and for IPIC to assume the debts and the assets, there will be a cost. Since June 4 last year, IPIC has been servicing all the interest due to the US$3.5 billion bonds, for which it is also a co-guarantor. Hence, 1MDB’s so-called US dollar-denominated assets had better have good value in them. Otherwise, it would have to find ways to raise fresh capital to pay the shortfall.

The asset sales so far have managed to pare down 1MDB’s debts substantially. If the strategic fund was not debt-laden, it would have been a cash-rich entity by now.

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