The world’s biggest Islamic debt offering of 2014 from Malaysia’s sovereign wealth fund will push the nation’s sukuk sales beyond 50 billion ringgit ($15.4 billion) for only the second time in 16 years.
1Malaysia Development Bhd. plans to sell as much as 8.4 billion ringgit of the notes, adding to the 46.9 billion ringgit sold so far that’s almost double the amount a year earlier. After 2012’s record issuance of 95.8 billion ringgit, which was distorted by a local toll-road operator’s unprecedented 31 billion ringgit sale, CIMB Group Holdings Bhd. and Asian Finance Bank Bhd. see 100 billion ringgit as being achievable in the next few years.
Prime Minister Najib Razak’s $444 billion development program contributed 21.2 billion ringgit to the sukuk total this year, data compiled by Bloomberg show. Bank Negara Malaysia’s decision to keep the benchmark policy rate on hold last week will also encourage issuers to tap the market given the likelihood increases will follow, according to CIMB.
“The sukuk market in Malaysia is a lot more active this year because of ongoing infrastructure spending,” Mohd. Effendi Abdullah, head of Islamic markets at Kuala Lumpur-based AmInvestment Bank Bhd., the country’s third-biggest sukuk arranger, said in phone interview yesterday. “This momentum is expected to overflow into 2015 as more corporates from neighboring countries may also tap the ringgit sukuk market.”
Sales Forecasts
1MDB’s Islamic bonds are planned before year-end and will finance the construction of a 2,000 megawatt coal-fired power plant in the state of Negri Sembilan, south of Kuala Lumpur, said two people familiar with the matter who asked not to be named because the information hasn’t been made public. The sukuk will be sold by Jimah East Power Sdn., which is 70 percent owned by the sovereign wealth fund and 30 percent by Japan’s Mitsui & Co. Ltd.
CIMB Islamic Bank Bhd. is working on a number of deals worth about 10 billion ringgit, which could come to market before year-end, said Badlisyah Abdul Ghani, the chief executive officer at the Shariah-compliant unit of CIMB Group, this year’s biggest sukuk manager. Issuance in Malaysia could reach 70 billion ringgit in 2014, he said.
AmInvestment Bank is forecasting total sales of 60 billion ringgit to 70 billion ringgit this year. That would exceed 2013’s 49 billion ringgit, data compiled by Bloomberg dating back to 1999 shows. The debt pays returns on assets to comply with Islam’s ban on interest.
Rising Yields
Kuveyt Turk Kira Sertifikalari, a Turkish asset leasing company, plans to raise as much as 2 billion ringgit from sukuk, according to a bulletin published on the Capital Markets Board in Ankara in September. PT Adira Dinamika Multi Finance, Indonesia’s largest consumer lender, may issue as much as $150 million of Islamic notes in Malaysia, while Japan Bank of International Cooperation is also considering a ringgit sale.
“This has been a good year for sukuk, driven mainly by infrastructure spending,” CIMB’s Badlisyah said in a Sept. 19 phone interview in Kuala Lumpur. “Malaysia’s growth rate of 6.3 percent in the first half of 2014 is positive and will help spur further sukuk issuance for project development.”
Corporate and government borrowing costs are rising in Malaysia after the central bank increased the benchmark policy rate in July for the first time since 2011 before keeping it unchanged on Sept. 18. Eleven of 21 economists surveyed by Bloomberg predict Governor Zeti Aktar Aziz will raise borrowing costs again before year-end, while the remainder see no change.
‘Strong Pipeline’
Average yields on conventional five-year bonds sold by the nation’s AAA-rated companies climbed 25 basis points, or 0.25 percentage point, to 4.21 percent this year, according to a central bank index. They reached 4.29 percent on Aug. 14, the highest level since April 2010.
“We expect ringgit sukuk issuance to pick up in the fourth quarter, with a strong pipeline supply from the infrastructure and financial sectors,” Angus Salim Amran, the Kuala Lumpur-based head of financial markets at RHB Investment Bank Bhd., a unit of RHB Capital Bhd., said in an e-mail interview yesterday. “We expect this year’s sukuk issuance to be in line with last year.”
Malaysia, which pioneered Islamic finance 30 years ago, is the world’s biggest sukuk market and accounts for $178 billion of the $290 billion outstanding globally, according to a June 4 report from Moody’s Investors Service.
The Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index, a benchmark that tracks the most-traded local-currency notes, gained 1.8 percent in 2014 to a record 106.99 after rising 2.8 percent in 2013.
‘Strong Possibility’
1MDB is turning to the ringgit-denominated bond market for only the third time since 2009 as it finances projects that are part of the government’s 10-year development program. The company, which is also building a new financial district in Kuala Lumpur, has outstanding debt of 30.6 billion ringgit, according to data compiled by Bloomberg.
The fund came under scrutiny in parliament last year after singling out Goldman Sachs Group Inc. to manage $6.5 billion of conventional bonds. The New York-based investment bank made about $500 million in commissions and trading gains for managing three sales of dollar notes, which opposition politicians said were excessive.
“While 1MDB’s planned sukuk is the biggest this year, there may be more such funding in the future given Malaysia’s development program and the expected infrastructure spending in Asia,” Mohamed Azahari Kamil, chief executive officer at Asian Finance Bank Bhd. in Kuala Lumpur, said in a phone interview yesterday. “There’s a strong possibility that issuance could reach 100 billion ringgit in the next few years.
(Bloomberg / 23 September 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
