Readers may recall this statement from S&P issued last year after IPIC declared 1MDB in default of its bond obligations, for which IPIC had provided guarantees on the basis that it would be fully indemnified by the Malaysian Government for any monies paid pursuant to those guarantees.
Consequently IPIC announced that it would seek recovery against 1MDB as well as the Malaysian Government, via its Minister of Finance Inc.
In a class case of preferring a form of words over legal substance (and I am being charitable in saying so) S&P 's Christian Esters told the Financial Times (UK):
“Our sovereign ratings refer to the sovereign’s ability and willingness to service financial obligations to non-official creditors,” said S&P Global Ratings credit analyst Christian Esters. “Consequently, we do not consider a contractual dispute and termination of a bilateral agreement between governments or their entities as sovereign default.”
S&P admitted in its own press release (see below) that it formed its opinion without bothering to look at the agreements between IPIC, 1MDB and the Malaysian Government( see bold below).Then again reading the press release below it is also evident that S&P does not quite comprehend that all bonds are in essence contracts which can give rise to "contractual disputes".
Meanwhile, as reported on this blog, that "contractual dispute" is growing into a ever larger obligation of the Malaysian Government. See1MDB to be liquidated soon-IPIC has absolutely no reason to accept "China will pay" plan,and rating agencies must now count 1MDB debt as sovereign debt
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 Malaysia's and 1MDB's Contractual Dispute With IPIC Is Not Considered A Sovereign Default, Says Report DUBAI (S&P Global Ratings) May 10, 2016--In a Credit FAQ published today, S&P Global Ratings explains why it does not view the contractual dispute between International Petroleum Investment Co. (IPIC), 1MDB, and the government of Malaysia as a sovereign default. For the full Credit FAQ, please see "How Does The Call Of IPIC's Guarantee On 1MDB's Bond Relate To Our Ratings On Malaysia And 1MDB's Debt?"
"Our sovereign ratings refer to the sovereign's ability and willingness to service financial obligations to nonofficial creditors," said S&P Global Ratings credit analyst Christian Esters. "Consequently, we do not consider a contractual dispute and termination of a bilateral agreement between governments or their entities as sovereign default."
On April 29, 2016, Abu Dhabi-based IPIC (AA/Stable/A-1+) announced that it had made a coupon payment under a guarantee it provides on bonds issued by a subsidiary of 1Malaysia Development Berhad (1MDB). 1MBD is a company incorporated in Malaysia, wholly-owned by the government of Malaysia (foreign currency: A-/Stable/A-2; local currency A/Stable/A-1). S&P Global Ratings does not rate 1MDB or any of the issuing subsidiaries, but we rate two bonds. Our rating on the 1MDB Energy Ltd. bond is based on what we view as an
unconditional and irrevocable guarantee provided by IPIC, while our rating on the 1MDB Global Investments Ltd. bond is based on the letter of support by the government of Malaysia (see "1MDB Global Investments' US$3 Billion Notes Rated 'A-'," published April 12, 2013, on RatingsDirect).
On April 18, 2016, IPIC announced that 1MDB and the Ministry of Finance of Malaysia had not fulfilled their obligations under an agreement with IPIC, and consequently this agreement was terminated. However, we consider that this did not have any impact on the validity of the original IPIC guarantees to the benefit of the noteholders. While we do not have the details of the agreement, we understand that this was a separate agreement entered into in 2015, independent from the original bond documents.
Malaysia's government has recently made clear its intentions to support the 1MDB borrowings that carry an explicit sovereign guarantee, and the rated 1MDB Global Investments Ltd. bonds that benefit from a letter of support.
We do not expect 1MDB to represent a large contingent liability to the
government (for more information on how we assess Malaysia's contingent
liabilities see "Contingent Liabilities And Sovereign Risk In Emerging
Markets: A Mounting Menace?" published May 4, 2016). A parliamentary committee reported in April 2016 that the company's debt amounted to approximately Malaysian ringgit (MYR)50 billion (around 4% of the country's GDP). It also assessed total assets at a little above that amount. Over the past year or so, the company has shown its ability to sell some of these assets to raise funds to pay down debt. We think that the government is reluctant to extend its support for debt beyond the level that it has explicitly guaranteed or extended in the letter of support (a total of MYR1717.6 billion or 1.4% of GDP). We do not consider these amounts to be material to the government's
balance sheet.
In our view, possible implications of the 1MDB dispute for Malaysia's
political stability could be of more relevance. Prime Minister Najib Razak is closely linked to the company and strong pressures have mounted on him to step down. Although Mr. Najib appears to have consolidated power for now, a disorderly change in the government cannot be ruled out and policy consistency could also be negatively affected (see "Politics May Shape Sovereign Rating Trends In Some Southeast Asia Nations," published May 9, 2016).
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