Awang Adek Hussin

Awang Adek Hussin

Malaysia’s Deputy Finance Minister, Awang Adek Hussin, said on Tuesday that the government would guarantee around $1 billion in bonds issued to fund a free zone project to allay investor concerns over the debt.

A fund manager who holds the debt, issued in 2003-2006 to fund the multi-billion dollar Port Klang Free Zone (PKFZ) project, said bondholders are concerned that letters of support honouring the bonds are not sufficient.

So they want the government to refinance the debt to overcome investor fears that they will not be repaid, said the fund manager, who spoke on condition of anonymity due to the sensitivity of the issue.

Malaysian Prime Minister Najib Razak told an investor briefing in New York on Monday that the government would honour all PKFZ obligations, said the fund manager, who attended the meeting.

The comment was confirmed by the finance ministry on Tuesday.

‘We will definitely honour the bonds,’ the Deputy Finance Minister said.

The free zone project has been dogged by allegations of corruption and mismanagement and Malaysian MARC ratings agency said in August it had downgraded the outlook on PKFZ-related debt to negative.

The fund manager said the bonds have fallen in value by 15 percent since they were issued, adding that concerned bondholders had sought to approach the Malaysian government.

‘A bondholders group led by UBS ( UBS – news – people ) has tried to talk to the Malaysian government to get clarity on whether they are going to honour the bonds,’ said the fund manager.

The Deputy Finance Minister said he was not aware of any approach by bondholders to the ministry.

A recent audit report on the port project, whose costs have surged to 10 billion ringgit ($2.95 billion) from an original 1.8 billion, said initial letters of government guarantee issued by transport ministers were given without the knowledge of the finance ministry.

To be legally enforceable as a letter a government guarantee, they have to be issued by the finance ministry.

‘There is a huge incentive for the government to solve this issue. The port bonds carry an A1 rating which is the same as sovereign bonds,’ the fund manager said.

The project has been dogged by allegations of corruption and a report presented to parliament identified irregular payments to contractors as well as mismanagement that resulted in cost overruns.

A report released recently by the Public Accounts Committee said that the former transport minister Chan Kong Choy should be investigated by the Malaysian Anti-Corruption Commission and police for criminal breach of trust.

The project, at Malaysia’s largest port which covers 1,000 hectares (405 hectares) is located approximately an hour from the capital of Kuala Lumpur.

Its development has also been hit by the pullout of the project’s Dubai-based partner.

In September, cabinet papers were leaked that showed a request from the finance ministry to retrospectively guarantee the bonds worth 4.6 billion ringgit. — REUTERS