Malaysia's 1MDB lifts IPO target to $3bln as debt swells -source

Reuters

* Early predictions had called for IPO of $1 bln to $2 bln

* 1MDB has come under fire for Goldman-managed debt deals

* 1MDB now Malaysia's No. 2 independent power producer

* Smooth sailing for deal not guaranteed -source

By Yantoultra Ngui and Niluksi Koswanage

KUALA LUMPUR, Sept 13 (Reuters) - State investor 1MalaysiaDevelopment Bhd (1MDB) has boosted the target size of its IPOfor its energy assets to around $3 billion, a person with directknowledge of the plan told Reuters, as the fund looks to repaydebt incurred in a shopping spree for power plants.

An IPO of more than $3 billion would make the 1MDB deal oneof Southeast Asia's largest public stock offerings.

1MDB, which is chaired by Prime Minister Najib Razak, hasbeen expected to launch an offering for at least a year, withearly predictions of its size ranging from $1 billion to $2billion.

After delays due to stock market weakness ahead of closelycontested elections in May, the IPO process is now kicking intogear and 1MDB is expected to invite banks next month to formallypitch their services, according to people familiar with thematter.

The timing of the pitching process means the 1MDB deal islikely to land sometime in the first half of 2014, they said.Goldman Sachs, Maybank and RHB areexpected to have a role in the deal due to their exposure to1MDB's debt, one person said.

1MDB, fully owned by the government, did not respond torequests for comment.

The fund garnered much negative publicity prior to thisyear's election, after $4.75 billion worth of debt offeringsmanaged by Goldman Sachs were launched with few public detailsand kicked in massive fees for the investment bank, according toIFR, a Thomson Reuters publication.

These transactions and others sparked criticism of thefund's debt levels and prompted Najib's political opponents,such as former deputy prime minister Anwar Ibrahim, to call 1MDBa slush fund for the prime minister. 1MDB countered that theallegations were an election ploy.

The person with direct knowledge of the plan said that1MDB's debt load is manageable.

"The higher debt is backed by strong assets, so this IPOcould be as big as Felda Global Ventures," the person said.

Felda, a Malaysian palm oil company, raised $3.2billion in a 2012 stock offering, which was Southeast Asia'sthird largest IPO on record. Petronas Chemicals' $4.7billion flotation and telecoms firm Maxis Bhd's $3.3billion listing - both from Malaysia - were the largest IPOs inthe region's history.

1MDB managed to get a six month extension until May 2013 torepay a 6.2 billion ringgit bridge loan to Maybank and RHB, akey step in allowing the fund to launch the planned IPO in thefirst half of next year, one of the people said.

POWER AND DEBT

For some observers, smooth sailing for the IPO is far fromguaranteed.

1MDB is racing against time to extend concessions for one ofthe five power plants it owns in Malaysia, as that permitexpires as early as 2016.

And to ensure strong demand for its IPO, it needs to securecontracts to build more power plants. According to local media,it has made a bid to construct a 2000 megawatt coal-fired plantand is seeking regulatory approval to expand an existing 762 MWplant.

"1MDB has to sort out its transparency issues, the negativeheadlines and take care of its existing assets before it can gofor this listing. Only then will it be smooth," said a financialsource with one of the Malaysian banks that 1MDB took loansfrom.

The debt offering that garnered the most criticism was aprivately placed $3 billion 10-year bond in late March, whichdebt capital market banking sources said made its debt moreexpensive and netted the U.S. investment bank $700 million inprofits, according to IFR.

That bond yields 4.4 percent, compared with 3.5 percent forMalaysian government's bonds that also mature in 2023. Publicdeals tend to be cheaper for issuers because the banksunderwriting the deal can speak to a broad range of investors todetermine the best price.

1MBD has defended the private placement, saying it wanted toensure timely completion of a joint venture with Abu Dhabi'sAabar Investments PJS to pursue energy and real estate projectsin Malaysia and the Middle East.

The fund started its buying spree in 2012 when it snapped uppower assets from Malaysia's second richest man, AnandaKrishnan, gaming-to-plantations group Genting Bhd andthe royal family from central Negeri Sembilan state.

1MDB's five power plants in Malaysia have a combinedgeneration capacity of some 3,700 MW that puts it in a goodposition to capture growing electricity demand in SoutheastAsia's third largest economy.

It also has 10 overseas, in countries such as Egypt,Bangladesh, Pakistan, Sri Lanka and the United Arab Emirates.

In addition to energy assets, 1MDB also has sizeableholdings in real estate, agribusiness and tourism.

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