Bank of Tokyo-Mitsubishi UFJ is planning a debut sukuk in Malaysia as Japan’s lack of Islamic finance rules forces companies overseas to tap Muslim investors.
Bank of Tokyo-Mitsubishi UFJ (Malaysia) Bhd., a member of the financial group that’s part of Japan’s biggest lender by market value, has set up a $500 million multi-currency program to sell debt complying with Koranic principles and is also considering offering the world’s first yen-denominated sukuk, according to a June 5 statement. The issuance will help manage the bank’s increasing Islamic financing needs, it said.
The lender joins Japan Bank for International Cooperation and the North Asian nation’s Aeon Credit Service (M) Bhd. in choosing Malaysia to sell Islamic bonds, taking advantage of Shariah-compliant banking assets that are set to double to $3.4 trillion worldwide by 2018. The 2.83 percent average yield on dollar sukuk globally is near a one-year low, while conventional emerging-market U.S. currency notes are paying 5.26 percent, according to Deutsche Bank AG and JPMorgan Chase & Co. indexes.
“The experience of Bank of Tokyo-Mitsubishi will be useful for other Japanese institutions to copy,” Raj Mohamad, managing director at Five Pillars Pte, a consulting firm in Singapore, said in an e-mail interview yesterday. “The awareness of Shariah products will improve and slowly it will give investors the opportunity to tap Japanese corporates.”
JBIC Offer
While Japan has no Islamic banking rules of its own, the government amended legislation in 2008 to allow subsidiaries of the country’s lenders and insurers overseas to provide financial services in accordance with religious tenets. Bank of Tokyo-Mitsubishi UFJ Malaysia offers Shariah-compliant loans and guarantees among its products in the Southeast Asian nation.
Japan Bank for International Cooperation, a state-owned lender, announced in April that it was considering selling its first Islamic bonds this year to fund a project in Malaysia. Aeon Credit Service (ACSM), the local unit of a Japanese consumer finance provider, said in December it was planning to sell sukuk with no set maturity, adding to previous offerings.
Average yields on global dollar sukuk have dropped 59 basis points, or 0.59 percentage point, in 2014 and reached a one-year low of 2.78 percent on May 29, the Deutsche Bank index shows. That compares with an 84 basis point decline in the JPMorgan gauge of developing-market debt.
Khazanah Cancels
Japanese banks are selling Islamic bonds to tap Shariah-compliant funds in Malaysia, Indonesia and the Middle East, said Mohamad at Five Pillars. A yen issue would attract interest from investors seeking securities with good ratings and an offering such as this would help boost secondary-market trading in the current buy-and-hold environment, he added.
While global yields have dropped this year, the FTSE Bursa Malaysia KLCI index of shares fell 0.2 percent. Malaysia’s sovereign wealth fund Khazanah Nasional Bhd. abandoned a plan last week to sell exchangeable dollar sukuk because pricing didn’t meet expectations, said a person with knowledge of the deal who asked not to be identified as the details are private.
Khazanah sold Singapore dollar-denominated convertible Islamic bonds in October via the special purpose company Indah Capital. It issued S$600 million ($480 million) of five-year debt at a minus 0.25 percent yield and carrying a 17 percent exchange premium, according to a company statement. The notes yielded minus 0.96 percent yesterday, according to data compiled by Bloomberg.
‘Hard Time’
Bank of Tokyo-Mitsubishi’s sukuk plan comes amid speculation borrowing costs will soon increase with the Federal Reserve (FDTR) on track to end its bond-buying program by year-end and start raising interest rates in 2015. The debt has been rated AAA by Malaysia’s RAM Rating Services Bhd., the highest investment grade.
“While demand for sukuk is still good, issuers who expect to get last year’s pricing for their bonds will be in for a hard time,” Azdini Nor Azman, the Kuala Lumpur-based head of treasury at Bank Muamalat Malaysia Bhd., said in a June 5 phone interview. “Issuers will have to stomach higher borrowing costs as yields are unlikely to fall from current levels.”
Nomura Holdings Inc. tapped the Malaysian Islamic bond market in 2010 and the notes have since matured. Toyota Motor Corp. sold 280 million ringgit ($88 million) of sukuk in 2012 in two offers via its unit Toyota Capital Malaysia Sdn. The 4 percent securities due in May 2015 aren’t actively traded and last yielded 3.58 percent on April 15, stock exchange data show.
‘Widely Accepted’
Global issuance of bonds that pay returns on assets to comply with Islam’s ban on interest rose 6.5 percent to $20 billion in 2014 from a year earlier, after reaching $43.1 billion last year and a record $46.5 billion in 2012, according to data compiled by Bloomberg.
The Bloomberg-Malaysia Sukuk Ex-MYR Index, which tracks global corporate and sovereign notes from Asia and the Middle East, gained 3.4 percent this year to 116.44, after rising 0.8 percent in 2013. It climbed to a record 116.47 on June 2.
“Islamic investment instruments are currently widely accepted even by conventional investors,” Abas A. Jalil, chief executive officer at Amanah Capital Group Ltd., a consultancy in Kuala Lumpur, said in an e-mail interview yesterday. “More Islamic institutions will start to understand the Japanese market better, and definitely it will start drawing more interest from both issuers and investors.”
(Bloomberg / 10 June 2014)
---Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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