1MDB should have been rolling in the black with some RM12bn in land revaluation gains; instead it finds itself pouring money into a black hole of borrowings incurred to finance goodness-knows-what, says Anil Netto.
Many are scratching their heads over the sale of the Bandar Malaysia land to a joint venture consortium and the convoluted share arrangements and financing of the deal.
But instead of getting mired in that, let’s zoom out at take a look at the big picture of the 1MDB land banks and how much they are worth.
Basically, there are two major land banks in 1MDB’s books:
- the Sungai Besi land for the Bandar Malaysia project and
- the Tun Razak Exchange project site (TRX).
If 1MDB had just sat on these land banks that it had bought cheaply from the government and then disposed of them, it could have made a fat surplus – without doing anything and without incurring much debt!
Let’s see how much these land banks are worth:
TRX land (70 acres):
Market value RM2,500/sq ft* x 70 acres x assuming 70% useable x 43,560 feet/acre = RM5.3bn
Acquisition cost RM65/sq ft x 70 acres x 43,560 feet/acre = RM0.2bn
Surplus on TRX land based on estimated current value = RM5.1bn
Bandar Malaysia land (486 acres):
Market value RM416/sq ft** x 486 acres x 43,560 feet/acre = RM8.8bn.
Acquisition cost RM76/sq feet x 486 acres x 43,560 feet/acre = RM1.6bn (which comes with a relocation agreement)
Likely revaluation gain on Bandar Malaysia land = RM7.2bn
Total surplus for both land banks – without doing any work: RM12.3bn, say RM12bn.
In other words, had the federal government not sold the land to 1MDB or had 1MDB not incurred debt (to finance who-knows-what) and then sold the land now, it would have been rolling in billions of ringgit in extra cash which would have enriched public coffers.
This RM12bn is based on a fairly conservative estimate of the valuation at a time of softening property prices. If 1MDB had not been desperate to sell to pay off its debts, it could have held on to the land banks until such time when property prices pick up again.
Anyway, out of the RM12bn estimated surplus, RM5bn had already been booked into the accounts of 1MDB as revaluation surpluses by 31 March 2014. This allowed 1MDB’s annual profits (or loss) to look much rosier than they actually were for several years.
These were the revaluation surpluses on the land banks booked into the 1MDB accounts for the financial years ending:
31 March 2011 = RM0.827bn.
31 March 2012 = RM0.570bn.
31 March 2013 = RM2.736bn.
31 March 2014 = RM0.896bn.
Total revaluation surpluses on investment properties already booked in: RM5.029bn, say RM5.0bn.***
(The audited accounts for the financial year ending 31 March 2015, which should have been submitted by 30 September 2015, have been delayed as auditors scratch their heads.)
Now let’s compare the RM5bn in revaluation surpluses already booked in to 1MDB’s total equity (attributable to the owner of the company) at 31 March 2014:
Capital RM1.0bn + Reserves (profits to date) RM0.7bn = Equity: RM1.7bn
This means that without the RM5bn in revaluation surpluses from the cheap land acquired from the government, the total equity in 1MDB would have been more than RM3bn in deficit – which would have indicated a company in dire financial straits, indeed insolvent.
Thus, the RM5bn in revaluation surpluses helped to gloss over the actual performance of the debt-saddled 1MDB.
Examine the fees paid to Goldman Sachs
Speaking of debts, investigators must also examine the fees paid to Goldman Sachs. According to the Wall Street Journal, “The bank was consulted during 1MDB’s inception, advised it on three acquisitions and arranged the sale of US$6.5 billion in bonds that alone brought in close to US$600 million in fees, according to people close to the bank.”
If this is true, the fees of close to 10% of bonds (long-term borrowings) raised appears exorbitant compared to the 1 or 2 per cent usually charged for arranging bonds, even after taking into account the speed with which the deals were arranged and the risks involved.
Goldman Sachs should be asked how it distributed the fees it received and to whom. It should also clarify if it had a profit-sharing scheme with its key employees or connected persons in South East Asia. If so, in the interest of transparency, it should be asked to provide the list of those persons at the time and how much each of them received. Inquiring minds want to know!
The only problem here is Goldman Sachs may not feel obliged to provide such information to Malaysian investigators. Local investigators should seek the assistance of their US counterparts for more details. An FBI spokesperson was reported as saying in mid-October 2015 that the US government was reviewing Goldman Sachs’ business relationship with 1MDB as part of a wide-ranging investigation.
Filling up the black hole?
As 1MDB has already booked in RM5bn out of a potential RM12bn property revaluation surplus, this means it still has a cushion of some RM7bn to gloss over its results and pay off the firm’s massive net debt pile of RM48bn in March 2015 (debt figure from The Edge).
Apart from financing the acquisition of power assets, what were all these debts incurred for in the first place, given that the land was acquired so cheaply?
This is where the MACC must look more closely at the international transfers from 1MDB (to whom?), which Sarawak Report (blocked in Malaysia) and the exposed email correspondence have described.
These transfers and correspondence could shed more light on how the huge amounts raised by 1MDB bonds and other borrowings were actually used.
Not a bailout?
Let’s be clear: the billions in surplus on disposal of the 1MDB land banks, acquired cheaply, is now being used to pay off 1MDB debts (incurred to finance what?).
If the land banks, had remained in federal government hands, there would not have been any need to pay off these debts. In fact, these valuable assets – or the billions in proceeds (when sold) – would have remained in public hands.
If 1MDB had not been forced into a firesale of the Bandar Malaysia land now, at a time when property prices are softerning, it could have made billions more by selling it later when property prices pick up. Or large portions of it could have been used for genuinely affordable housing and a public park.
Whichever way you look at it, it is a staggering loss to the public.
* Mahathir had estimated the TRX land value at RM3,000psf in April 2015. The Edge (4 January 2016) used what it said was a conservative value of RM3,500psf based on recent small sales of TRX land. Given the softer property market, however, I am using an even more conservative figure of RM2,500psf. I am also assuming that only 70% of the land can be used for private development, with the remainder set aside for public infrastructure and amenities.
** Given that the 60% valuation of the sale of the Bandar Malaysia land bank to Iskandar Waterfront Holdings-China Railway Engineering Corp (M) Sdn Bhd (CREC) was reportedly worth RM7.41bn, the implied value of the 100% would be RM12.35bn. Dividing that by 486 acres would give RM583psf, as reported earlier. (Mahathir, for his part, had estimated the Bandar Malaysia land value at RM1,000psf in April 2015.)
But now the China-led consortium reportedly claims the land (its 60% share) is worth only US$1.2bn (RM5.3bn) rather than US$1.7bn (RM7.4bn) as earlier reported. If that’s the case, the implied value of the whole land bank is RM8.8bn or RM416psf. (Is the China-led consortium driving a hard bargain, perhaps knowing that 1MDB is in dire straits and desperate for a firesale?)
*** To confirm the figure of RM5.0bn revaluation surpluses already booked in, let’s look at 1MDB’s balance sheet as at 31 March 2014:
The investment properties, mainly the two land banks, are shown in the balance sheet as RM7.1bn.
This is basically made up of RM0.2bn (TRX acquisition cost) + RM1.6bn (Bandar Malaysia initial cost) + RM0.3bn (others) + RM5.0bn (revaluation surpluses booked in) = RM7.1bn.