Bandar Malaysia: Is there still a need to rush?

The news that the Malaysian Ministry of Finance has called off the sales of 60% interest in Bandar Malaysia due to non-payment came as a surprise to many.

MOF had said that the buyer, IWH CREC Sdn Bhd (ICSB), the consortium of locally-owned Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (CREC) from China (M) failed to meet the payment obligations despite being granted repeated extensions.

Seeking to pounce on anything negative about 1MDB, the likes of Wall Street Journal and the Pakatan politicians has also came out with messages that says China has refused to allow CREC to bring money out of China to invest or that the cancellation of this deal is proof that the Bandar Malaysia project is not-viable.

Some Pakatan politicians such as DAP's Tony Pua  has opportunistically slammed the cancellation saying 1MDB's rationalization plans have failed and that Arul Kanda must resign.

Strangely, these politicans were the people who had initially slammed the signing of this sale in end 2015 - claiming it is Jual Negara to China.

And now, they are slamming that the deal has been cancelled?

These politicians are strange creatures.

If the reason for non-payment is indeed due to the capital controls imposed by China to stop outflows of funds and protect their foreign reserves, then this is not the first or only case.

There have been many deals in the world that was affected by these capital controls as you can read in the South China Morning Post article here.

In fact, a month back the media had also highlighted the Forest City project in Johor was briefly affected by  the capital controls.

However, in my opinion, there are many other reasons for the cancellation of this deal but chiefly, I believe there is simply no more need to rush and 1MDB and MOF can wait to extract bigger value and a better deal for Malaysia.

These are my reasons:

1. The political pressure on 1MDB has eased tremendously since 2015.

The period when the tender for Bandar Malaysia was called in Aug 2015 was also the period where the political pressure on 1MDB, PM Najib and the Government was the highest,

Hence there was a need to prove that 1MDB can monetize its assets and pay-off its big debts by itself without any assistance or bail-out for the government.

Due to the huge world-wide negative publicity on 1MDB then, it is likely that the Bandar Malaysia sale may not have gotten its best value.

On top of that, there was also uncertainty about Malaysia's economy in 2015 which came true when our economy slowed in 2016 - which would mean the Bandar Malaysia asset was not as attractive then.

Now that the political pressure and negative publicity of 1MDB has eased and our economy has started to recover strongly, it is likely that new bidders and more bidders may give a higher valuation for the strategic Bandar Malaysia land.

2, 1MDB cash-flow now is no longer squeezed compared to that period in 2015.

Recall that the sale of Edra  for a combined equity and debt of about RM17 billion in 2015 has allowed 1MDB to clear off all short-term loans and bank debts - except for the 3 bonds due in the years 2038, 2022 and 2023 - and has left 1MDB with RM2 billion cash to pay off bond interests and working capital requirements.

1MDB had also successfully sold plots of the Tun Razak Exchange (TRX) land to various local and international buyers which also has helped with 1MDB's cashflow.

It is also important to note that last week's settlement between Abu Dhabi and 1MDB has allowed 1MDB to monetize US$2.43 billion worth of fund units.

On 28th April 2017, the Singapore Straits Times owned by the Singapore government reported:

"To overcome the hurdle, 1MDB agreed to waive its right to claim from Aabar the US$2.43 billion guarantee. In return, Abu Dhabi arranged for an undisclosed entity domiciled in the Seychelles to buy the units from 1MDB at the guaranteed value, to be settled by deferred payments from this month to October 2022, said a senior financial executive familiar with the matter.

Out of this US$2.43 billion, US$1.2 billion have to be paid to IPIC by the end of this year while the remaining US$1.23 billion (RM 5.32 billion) will be used to pay off half-yearly interests right up to the year 2022 for the US$3.5 billion bonds.

On top of this, 1MDB had also cleared the way to pay off its biggest single debt - which is this US$3.5 billion bonds where the Singapore Straits Times also said:

"Under the settlement, Malaysia and IPIC will enter into negotiations to resolve roughly US$3.5 billion in cash advances and payments 1MDB made to several Abu Dhabi entities. Should IPIC fail to make full settlement before the deadline of end-December 2020, the Malaysian government can pursue legal claims against IPIC."  

Certainly there is new found cash-flow flexibility for 1MDB here.

The single biggest concern about the termination of the sale of Bandar Malaysia is really the RM2.4 billion Bandar Malaysia sukuk which is only due in various phases between the year 2021 to 2024 - but you can weigh that against the additional RM5.32 billion in cash-flow flexibility arising from the monetization of the fund units.

Therefore, there is certainly breathing space and cash-flow flexibility for MOF and 1MDB to extract the best value for Bandar Malaysia now which did not exist in the year 2015.

This is further evidenced by TRX's bold declaration early last month that there will be no more land sales in TRX for the next two to three years in order to unlock a higher land premium later,

3. The value and prospects for Bandar Malaysia have greatly increased since.

Remember that the tender for Bandar Malaysia was called in August 2015 and the signing of the sale was in December 2015 amidst great negative publicity and a slow-down in the economy then which has now improved on both counts.

Since then, land values in the Klang Valley has increased and much have been done to increase the prospect or remove the uncertainties for Bandar Malaysia.

For one, the MRT2 Sungai Buloh–Serdang–Putrajaya line has started construction and will have two stations in Bandar Malaysia - SSP21 and SSP22.

Additionally, the Singapore-Kuala Lumpur High Speed Rail-line agreement was finally signed on Dec 14, 2016 between the governments of Singapore and Malaysia which also confirms Bandar Malaysia to be the terminus station.

This signing moves it from being a planned HSR project to a confirmed HSR project in progress.

High-Speed Rail official signing in December 2016

The realignment of the Duta-Ulu Kelang Expressway Phase 3 (DUKE 3) expected to run along the border Bandar Malaysia has also been signed by the government in January 2016.

Certainly the confirmed and increased connectivity has further increased the value of Bandar Malaysia since the tender and signing of sale in 2015.

At the time, the total value of Bandar Malaysia based on the 60% sale price of RM7.41 billion was RM12.35 billion for the 486 acres land or 21.17 million square feet.

That works out to just RM583 per square feet.

Compare this to the plots of land sold in nearby TRX including Tabung Haji's acquisition of land in TRX for RM2,780 psf and Mulia Group's acquisition of land in TRX for RM4,490 psf -  in line with other commercial land deals in the Jalan Ampang and KLCC areas that were transacted around the RM3,000 to RM3,500 psf range.

And you must remember also that once the HSR is completed, Bandar Malaysia is just 90 minutes away from Singapore by rail.

Singapore commercial land prices are very high. In Oct 2016, a 1.1 Hectare plot of land was sold for SGD2.57 billion (RM7.96 billion). This works out to a staggering RM67,228 psf.

Even if Bandar Malaysia land is worth only 5% of Singapore land, it is already RM3,361 psf - much higher than the RM583psf in the now aborted sale.

In fact, one of the buyers IWH had publicly estimated the value of the Bandar Malaysia land at RM26 billion less than 3 months ago in an interview in February 2017 more than double the RM12.35 billion valuation during the sales signing in December 2015.

Tan Sri Lim Kang Hoo of IWH valuing the Bandar Malaysia land at RM26 billion now

Additionally, 1MDB and MOF, as the single largest shareholder in Bandar Malaysia also benefits from the 16 months planning and publicity put into developing Bandar Malaysia.

Aborting the sale does not mean that the High Speed Rail project or Bandar Malaysia project has been cancelled. It just mean that there are possible new JV partners coming in. MOF continues to plan and develop the site while waiting for new partners.

As one of my friends put it:

This is business matter and not politics as bring played by PH. If the government had played politics, then they would have further extend the agreement and terminate it after the election.

Conclusion

The financial markets have decided that the initial buyers are the losers in this cancellation. Share prices of locally listed IWH and its sister company Ekovest was punished by the markets - with Ekovest dropping as much as 30% within a single day after the cancellation of the sale was announced.

The cancellation of the sale certainly benefits the Malaysian Govt more than the private companies which got punished badly.

With the reasons given above, MOF's bold decision to cancel the sale agreement due to delayed payments is a positive step to ensure Malaysia and the Rakyat gets a better deal as it puts 1MDB and MOF in a much stronger and un-pressured position to extract higher values.

However, all is not cast in stone yet as IWH and China Rail has strongly protested the cancellation while PM Najib is scheduled to attend a Belt and Road forum in China next week where Malaysia is expected to sign a Memorandum of Understanding on basic infrastructure development with China.

I would not be surprised if Malaysia and the buyers revive the sale -perhaps with penalties for late payment or even revised terms and valuation more favourable to Malaysia. After all, the JV for Bandar Malaysia was one of those deals signed in PM Najib's historic visit to China in November 2016 where President Xi Jinping was a witness.

Regardless of the outcome, the evidence shows that the move by MOF to cancel the sale of Bandar Malaysia yesterday was the right move to extract better value for Malaysia.