* Early predictions had called for IPO of $1 bln to $2 bln
* 1MDB has come under fire for Goldman-managed debt deals
* 1MDB now Malaysia's No. 2 independent power producer
* Smooth sailing for deal not guaranteed -source
By Yantoultra Ngui and Niluksi Koswanage
KUALA LUMPUR, Sept 13 State investor 1Malaysia Development Bhd (1MDB) has boosted the target size of its IPO for its energy assets to around $3 billion, a person with direct knowledge of the plan told Reuters, as the fund looks to repay debt incurred in a shopping spree for power plants.
An IPO of more than $3 billion would make the 1MDB deal one of Southeast Asia's largest public stock offerings.
1MDB, which is chaired by Prime Minister Najib Razak, has been expected to launch an offering for at least a year, with early predictions of its size ranging from $1 billion to $2 billion.
After delays due to stock market weakness ahead of closely contested elections in May, the IPO process is now kicking into gear and 1MDB is expected to invite banks next month to formally pitch their services, according to people familiar with the matter.
The timing of the pitching process means the 1MDB deal is likely to land sometime in the first half of 2014, they said. Goldman Sachs, Maybank and RHB are expected to have a role in the deal due to their exposure to 1MDB's debt, one person said.
1MDB, fully owned by the government, did not respond to requests for comment.
The fund garnered much negative publicity prior to this year's election, after $4.75 billion worth of debt offerings managed by Goldman Sachs were launched with few public details and kicked in massive fees for the investment bank, according to IFR, a Thomson Reuters publication.
These transactions and others sparked criticism of the fund's debt levels and prompted Najib's political opponents, such as former deputy prime minister Anwar Ibrahim, to call 1MDB a slush fund for the prime minister. 1MDB countered that the allegations were an election ploy.
The person with direct knowledge of the plan said that 1MDB's debt load is manageable.
"The higher debt is backed by strong assets, so this IPO could be as big as Felda Global Ventures," the person said.
Felda, a Malaysian palm oil company, raised $3.2 billion in a 2012 stock offering, which was Southeast Asia's third largest IPO on record. Petronas Chemicals' $4.7 billion flotation and telecoms firm Maxis Bhd's $3.3 billion listing - both from Malaysia - were the largest IPOs in the region's history.
1MDB managed to get a six month extension until May 2013 to repay a 6.2 billion ringgit bridge loan to Maybank and RHB, a key step in allowing the fund to launch the planned IPO in the first half of next year, one of the people said.
POWER AND DEBT
For some observers, smooth sailing for the IPO is far from guaranteed.
1MDB is racing against time to extend concessions for one of the five power plants it owns in Malaysia, as that permit expires as early as 2016.
And to ensure strong demand for its IPO, it needs to secure contracts to build more power plants. According to local media, it has made a bid to construct a 2000 megawatt coal-fired plant and is seeking regulatory approval to expand an existing 762 MW plant.
"1MDB has to sort out its transparency issues, the negative headlines and take care of its existing assets before it can go for this listing. Only then will it be smooth," said a financial source with one of the Malaysian banks that 1MDB took loans from.
The debt offering that garnered the most criticism was a privately placed $3 billion 10-year bond in late March, which debt capital market banking sources said made its debt more expensive and netted the U.S. investment bank $700 million in profits, according to IFR.
That bond yields 4.4 percent, compared with 3.5 percent for Malaysian government's bonds that also mature in 2023. Public deals tend to be cheaper for issuers because the banks underwriting the deal can speak to a broad range of investors to determine the best price.
1MBD has defended the private placement, saying it wanted to ensure timely completion of a joint venture with Abu Dhabi's Aabar Investments PJS to pursue energy and real estate projects in Malaysia and the Middle East.
The fund started its buying spree in 2012 when it snapped up power assets from Malaysia's second richest man, Ananda Krishnan, gaming-to-plantations group Genting Bhd and the royal family from central Negeri Sembilan state.
1MDB's five power plants in Malaysia have a combined generation capacity of some 3,700 MW that puts it in a good position to capture growing electricity demand in Southeast Asia's third largest economy.
It also has 10 overseas, in countries such as Egypt, Bangladesh, Pakistan, Sri Lanka and the United Arab Emirates.
In addition to energy assets, 1MDB also has sizeable holdings in real estate, agribusiness and tourism.