SINGAPORE: The cost of insuring against losses on Malaysian government bonds rose Tuesday on concerns that Putrajaya could be on the hook for billions of dollars of debt owed by 1MDB, the Wall Street Journal reports. The state fund, which is the focus of corruption probes in at least seven countries, has almost US$13 billion in debt it is struggling to repay. The WSJ said a dispute made public this week between 1MDB and International Petroleum Investment Company, the Abu Dhabi guarantor of some of its debt, had put the future of a debt-workout agreement in doubt. This, in turn, has shaken investors who fear the Malaysian government may need to step in. “The cost of insuring five-year Malaysian government bonds rose to US$164.20 on Tuesday, up from US$160.18 at Monday’s close and 9.7% more expensive than at Friday’s close before the dispute became public. The bond prices themselves were little changed, with the five-year yield at 3.42% on Tuesday, from 3.41% a day earlier.” The WSJ quoted Japanese brokerage Nomura as saying it was turning negative on Malaysian credit and lowering its recommendation to below the market average from “neutral,” partly due to “further concerns around the finances of 1MDB”. The dispute between 1MDB and IPIC is over a 2012 debt-restructuring agreement struck between the two sovereign funds in which IPIC guaranteed US$3.5 billion of 1MDB’s bonds. It later also granted an emergency billion-dollar loan to 1MDB and pledged to continue making interest payments on the same bonds it had guaranteed. In return for IPIC taking over the debt, 1MDB agreed to transfer undisclosed assets to the Abu Dhabi fund, according to stock-exchange filings. That agreement appears to have fallen through, the WSJ report said. It said 1MDB didn’t respond to an emailed request for comment on Tuesday but that in a statement made on Bloomberg television, 1MDB President Arul Kanda said the company expected an “amicable resolution” to the dispute with IPIC and that 1MDB would be able to cover short-term interest payments on its bonds even if IPIC didn’t. The report said analysts, however, expected IPIC to honour its guarantee of the 1MDB bonds as there was a grace period of five days from Tuesday to settle the US$50 million overdue interest payment. Michael Every, head of financial markets research for Asia at Rabobank in Hong Kong, was quoted as saying that this disagreement between IPIC and 1MDB meant negative investor sentiment towards Malaysia. The report said some investors think the market had become numb to negative news on 1MDB. It quoted Edmund Goh, an investment manager for Aberdeen Asset Management, as saying, “We think the market will give Malaysia the benefit of doubt and this will not affect Malaysia’s sovereign debt. It’s a serious issue, but we investors [think] so long as [Malaysian Prime Minister] Najib [Razak] can keep power he will resolve this.”
Following on from our note this week warning that Malaysia 's credit rating is at risk from the 1MDB bond dispute , the cost of insuring against losses on Malaysian debt bonds rose over fears that the national government may have to pay out billions of dollars of debt owed by 1Malaysia Development Bhd ( 1MDB ) , the state fund embroiled in corruption investigations in at least seven countries ; 1MDB has around $ 13bn in debt which it is struggling to repay and the outcome of a dispute between banks and the Abu Dhabi guarantor of some of its debt has put in jeopardy the future of the debt - fixing scheme , and in turn spooking investors .