KUALA LUMPUR: Deputy Finance Minister Datuk Seri Awang Adek Hussin said yesterday that the government would guarantee around US$1 billion (RM3.39 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.

Prime Minister Datuk Seri 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 yesterday. “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 MARC ratings agency said in August it had downgraded the outlook on PKFZ-related debt to negative.

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

“A bondholders group led by UBS has tried to talk to the Malaysian government to get clarity on whether they are going to honour the bonds,” said the fund manager.

A recent audit report on the port project, whose costs had surged to RM10 billion from an original RM1.8 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 letters of 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 had 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 former transport minister Tan Sri Chan Kong Choy should be investigated by the Malaysian Anti-Corruption Commission and police for criminal breach of trust.