Time to take a walk on the floating side
The secondary loan market is ripe for a major revi...
Has the concept of political risk been eradicated in the sovereign state of Malaysia? I ask this question because it appears that for all the shenanigans associated with the alleged fraud at state-owned investment company 1Malaysia Development Berhad (1MDB), Malaysia still appears as bright as a new penny when it comes to the perceptions of international investors.
To take one example, CIMB, one of Malaysia’s largest banks, managed over a week ago to place the largest Reg S US dollar offering from a Southeast Asian financial borrower in almost seven years.
This came via a US$1 billion dual-tranche offering in three-year floating and 10-year fixed format, with both pieces tightening by 25bp soon after the break.
The outcome was no doubt perceived as a triumph, both within the walls of CIMB’s headquarters and within the ranks of Malaysia’s government. It’s as if the 1MDB scandal, which would have brought down the government of any developed nation, and the government of many developing ones, has been swatted off like an irritating fly. It should just be business as usual, as the CIMB bond issue appears to have demonstrated.
I find Malaysia an interesting item when it comes to the notion of “moral hazard” in financial markets. You will recall that this concept was invoked by the then Treasury secretary Henry Paulson almost a decade ago when he refused to bail out Lehman Brothers with government cash in the face of the firm’s bankruptcy.
The axiomatic concept of moral hazard in finance is that the perceived assumption of government support for failed or failing institutions leads to systemic risk. A false level of comfort is provided which sooner or later will lead to the whole pack of cards tumbling down.
So just how does moral hazard stand in Malaysia, or put another way, how does political risk look in that country? Criminal investigations into the alleged misappropriation of billions of dollars from 1MDB are ongoing in a variety of jurisdictions through which supposedly that cash was laundered.
Two banks in Singapore associated with 1MDB’s activities have been shut down by the city state’s authorities, whilst four bankers are serving jail terms for helping transact for the Malaysian state-owned company. Meanwhile a US civil case brought by the Department of Justice (DoJ) involving an attempt to requisition US$1 billion of assets used in America to purchase assets including real estate and fine art is ongoing.
As far as moral hazard in the Hank Paulson conception of the term is concerned, Malaysia has found form in the copy book with what appears to be a partial bailout of 1MDB; the Malaysian government has assumed all of 1MDB’s land assets and the borrowings associated with their purchase. Opposition MP Tony Pua suggests this creates a burden of 3.2 billion ringgit for the government.
Separately there is speculation in Malaysia that the East Coast Rail contract with China has had its total costs inflated with the aim of helping 1MDB clear its mountain of debt, which was last estimated at around the US$11 billion mark – there is no clarity on this number, since 1MDB has not filed audited reports in three years.
All this should give investors pause, to say nothing of the Malaysian populace. One wonders if the perception among investors that the Trump administration will pull back on the DoJ case against 1MDB helped the CIMB deal across the line.
You might assume that the checks and balances built into the US legal system will mean the DoJ’s case will proceed as it would have under the Obama administration. This even though the Trump administration’s key financial posts are held by former Goldman Sachs bankers; the US firm was the lynchpin in raising debt capital for 1MDB.
One can simply watch and wait. But to suggest that political risk or indeed moral hazard have been annihilated in Malaysia is simply to tempt fate.
21 Mar 2017