Bankers concerned over 1MDB’s expansion plans

PETALING JAYA: 1Malaysia Development Bhd (1MDB) is believed to be eyeing a power plant in India to expand its power generation business ahead of its planned listing.

Bankers, however, are believed to be uncomfortable with the financing plan to acquire the asset in India, given its already heavy balance sheet.

Fresh from winning Project 3B and inking an agreement to build a 50 MW solar power plant, 1MDB is on the prowl for another power plant to bulk up its assets to make the planned listing of its energy unit more appealing to investors.

The power plant it is said to have identified is located in energy-hungry India.

However, sources said the Minister of Finance Inc-owned entity was looking to fund the purchase by tapping into the cash resources of its existing power plants, something that bankers are not happy with.

“Indian power plants are seen by some as prized assets, considering that the country is in dire need of new power generating capacities. Also, a lot of power assets are cheap now because the rupee has depreciated and foreigners are tired of the regulatory issues,” said a source.

“But bankers are against the idea because cashflow and equity in the existing power plants are ring-fenced against the borrowings. Its cash cannot be utilised to fund new acquisitions. It would be against the debt covenants,” said the source.

“1MDB was supposed to go for a listing, reduce its borrowings from the proceeds of the initial public offering (IPO) and then go for new acquistions with a leaner balance sheet. Until then, the cash and equity in existing assets are to remain with the respective companies.”

1MDB did not respond to queries from StarBiz at the time of writing. So far, 1MDB has only acquired power plants in the domestic market, where it is well-known because of its position as a Government-backed fund.

“1MDB would find it hard to secure financing for new power plants outside Malaysia, given the huge amount of debt it has accumulated after a shopping spree of power plants over the last 18 months,” noted a banker.

According to a summary of its results for the financial year ended March 31, 2013 (FY13), the firm’s total liabilities stood at RM42.28bil, as compared to RM8.38bil in 2012. The liabilities were backed up by assets to the tune of RM44.66bil.

Among the notable assets the firm acquired in FY13 were the Genting group’s power-generation unit, Sanyen Sdn Bhd, for RM2.38bil, and the Tanjong group’s power unit, Tanjong Energy Holdings Sdn Bhd, for RM8.5bil from tycoon T. Ananda Krishnan.

In 2013, it had bought 75% of the Jimah power plant for RM1.2bil from the Negri Sembilan royal family.

The power plants were financed by new bonds issued by 1MDB. In the acquisition of Tanjong Energy, the papers issued were to the tune of RM6.5bil, while the rest was an equity of RM2bil.

The cashflow coming from the power plants are ring-fenced to meet the debt obligations. The RM2bil equity is also to be kept in the company until the listing.

Tanjong Energy, which is now known as Powertek Energy Sdn Bhd, has a presence in Bangladesh, Egypt, Pakistan, Sri Lanka and the United Arab Emirates.

1MDB received a growth catalyst to bolster its IPO planned for within the next one year when it won the bidding to build the 2,000MW coal-fired power plant known as Project 3B estimated to cost RM11bil last month, beating rival YTL Power International Bhd.

On Monday, it sealed a deal to build a 50MW solar photovoltaic energy facility in Kedah.

It plans to raise around US$2bil (RM6.6bil) from the listing of its power assets.

For FY13, the firm recorded a pre-tax profit of RM877.67mil on a turnover of RM2.59bil as opposed to FY12 pre-tax profit of only RM44.72mil on an RM633.18mil turnover.

This profitability, according to a report, was largely due to revaluation gains of RM2.7bil from its properties.