Abu Dhabi fund's propositions will be closely watched


  • Business
  • Saturday, 26 Apr 2014

WHETHER by design or otherwise, the latest annual report issued by 1Malaysia Development Bhd (1MDB) has much higher standards of disclosure compared to reports in the previous years.

The 173-page document detailing the operations of the fund set up in 2009 to act as a catalyst to attract projects that bring about a high multiplier effect to the economy gives an insight into why sovereign funds linked to the Abu Dhabi government had given guarantees to 1MDB in its acquisition of power plants in Malaysia.

In 2012, 1MDB had to issue US-dollar debt papers to the tune of US$3.5bil (RM11.45bil) when it acquired power plants from Tanjong Plc and the Genting group.

The acquisitions, for a total of RM10.88bil, gave 1MDB immediate exposure to power plants in Malaysia, Egypt and Bangladesh.

Abu Dhabi-based International Petroleum Investment Company PJC (IPIC) and the company jointly guaranteed the US-dollar debt papers.

When IPIC came into the picture, the broad question asked then was: Why would an Abu Dhabi-based fund provide a corporate guarantee to 1MDB in acquiring power plants whose power purchase agreements (PPAs) had only a few more years to go before expiry?

The accounts of 1MDB ended March 31, 2013 reveal three things that could have attracted the Abu Dhabi fund to lend its name.

First, the power plants in Malaysia, despite having only a few years left of the existing PPAs, have a lifespan of up to another 15 years to continue supplying power to Tenaga Nasional Bhd (TNB).

This is by virtue of an option to extend the PPAs by three additional five-year terms, subject to the agreement being agreed upon by TNB.

As for the Bangladeshi power plant, there is no expiry for the agreement, meaning it can continue to operate until the end of its economic life. Only the power plants in Egypt have to be transferred to the off-taker at the end of the PPA, which has some years to go.

So, what this means is that the power plants still have some potential to make decent returns.

Second, disclosure in the annual report shows that the power plants in Malaysia have an economic lifespan estimated at between 35 and 40 years. This is well beyond the original PPAs that would last 21 years.

Typically, the returns in the first 21 years are more than enough to pay off the loans taken to build the facility. So, the remaining economic lifespan of the power plants would generate pure returns.

What this means is that the new PPAs could be renewed at lower rates, something that would contribute to the value of the power plants.

Third, in return for IPIC lending its name to guarantee the loan, its sister-company Aabar Investments PJS has the option to subscribe for a stake of up to 49% in the Tanjong and Genting power plants. The option is open for 10 years at a price to be determined.

Genting has already got a 10-year extension to its existing PPA, which will now end in 2026. This means Aabar Investments can realise its option to end up with a stake in the power plant.

The power plants under Tanjong, however, have yet to obtain an extension, but the chances are bright.

So, when 1MDB’s power-generation unit goes for a listing, Aabar Investments should be able to capitalise on the upside by virtue of the option to buy equity stakes in the Tanjong and Genting power plants.

All this because it had lent its name to the debt papers. It did not incur cost but took on risk, and for this, it gets a slice of the pie in Malaysia’s largest power plant listing. Not too bad for an undertaking given less than two years ago!

The cost, however, is to 1MDB.

If it had not needed the guarantee, then the fund would have 100% equity ownership of the power plants and would be able to reap all the benefits from the listing.

Why was the guarantee from IPIC needed in the first place? What is the value it brings to the table?

The partnership between 1MDB and the Abu Dhabi fund in the property development business raises more questions on the value the Middle-East fund brings to the table.

In August 2013, 1MDB had entered into an agreement with Aabar Investments to sell a 50% stake in Abu Dhabi Malaysia Investment Company Ltd, the company that is the master planner and developer for the Tun Razak Exchange (TRX).

The other 50% is held by 1MDB’s wholly owned subsidiary, 1MDB Global Investments Ltd, that has raised US$3bil with a comfort letter from the Government.

Property development is not rocket science. It’s all about location and the ability of developers to phase out the development. TRX, incidentally, is located on a prime site in the city.

Malaysian companies are already world champions in the property development sector. Developers from China are flocking here to form partnerships with local companies. The case in point being the S P Setia Bhd-led consortium which is undertaking the massive Battersea Power Station redevelopment project in the United Kingdom.

Why isn’t 1MDB teaming up with local property developers for the TRX project then? What is the value that Aabar Investments is bringing to the table for 1MDB’s property projects?

The Government has given special tax exemptions for companies putting up their headquarters in TRX. Such incentives are already a big boost for TRX.

What is the extra edge that Aabar Investments has that local property giants don’t?

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