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Malaysia stars align just as US$1.5b Islamic bond sale seen
[KUALA LUMPUR] The stars are aligning for Malaysia just as the government is seen raising US$1.5 billion in the Islamic debt market.
The planned sale coincides with a rally of more than 10 per cent in the ringgit this year as a pickup in crude prices boosts finances for the oil exporter and pushes down bond risk from a seven-year high.
The offering will test investor confidence when Prime Minister Najib Razak is embroiled in a corruption scandal and amid international probes into state investment company 1Malaysia Development Bhd, whose board he chairs. 1MDB is in the process of winding down operations and selling off assets to repay debt.
"The Malaysian name was oversold last year because of the combination of concerns over 1MDB, the commodity rout and expectations of a US interest-rate hike," said Edward Iskandar Toh, chief investment officer for fixed income at Areca Capital Sdn, which oversees RM500 million (S$173 million) in Kuala Lumpur. "But these factors are less prevalent now. Political risk in Malaysia is also not seen as critical at this point."
The marketing of as much as US$1.5 billion of global notes started on Monday and they will likely have maturities of 10 and 30 years, according to two people familiar with the matter, who asked not to be identified because the information is private. JPMorgan Chase & Co, CIMB Group Holdings Bhd, Malayan Banking Bhd and HSBC Holdings have been selected as arrangers.
Malaysia last sold US currency sukuk in April 2015, its first international bond since 2011. It raised US$1.5 billion via 10- and 30-year notes and got orders for US$9 billion. When Indonesia issued US$2.5 billion last month across five- and 10-year maturities, subscriptions totaled US$7.7 billion.
"The current market conditions are supportive," said Winson Phoon, fixed-income analyst at Maybank Investment Bank Bhd in Kuala Lumpur, a unit of Malaysia's biggest Islamic bond arranger. "Demand will be strong given that the size isn't too excessive and after the keen interest in the Indonesian sovereign sukuk."
A resurgence in demand for emerging-market assets is helping shore up the order books, as are the easing of monetary conditions in developed countries. Both the European Central Bank and the Bank of Japan have cut interest rates to negative to stimulate their economies, which tends to feed demand for higher-yielding debt elsewhere.
The US has also said it will go slow with the pace of its rate increases amid the uncertain global outlook.
1MDB repaid RM950 million in debt to the government last week after completing the sale of its power assets to China General Nuclear Corp for RM9.83 billion in March.
The firm won't have any short-term debt and bank loans once it has settled a total of RM6 billion in the coming weeks, its President Arul Kanda said in an interview on March 30.
Even so, transcripts from a Malaysian parliamentary hearing into the state investment firm highlight the prime minister's involvement in decisions on questionable transactions that bypassed the board of directors and finance ministry.
The documents from the committee's probe of 1MDB are a blow to Najib's efforts to halt months of political attacks and to draw a line under allegations of irregularities surrounding the fund.
Malaysia issued US$1 billion of 10-year Shariah-compliant bonds to yield 3.04 per cent and US$500 million of 30-year debt at 4.24 per cent last year. The yield on the shorter-maturity notes has declined 62 basis points in 2016 to 2.99 per cent, while that on the 2045 debt fell 76 basis points to 3.95 per cent, data compiled by Bloomberg show.
The nation may have to offer a premium of 125 to 150 basis points over similar-maturity US Treasuries for a new 10-year sukuk, said Angus Salim Amran, the Kuala Lumpur-based head of markets at RHB Investment Bank Bhd, the country's third-biggest Islamic bond arranger. That's equivalent to 2.99 percent to 3.24 per cent based on current yields.
Malaysia is rated A- by Standard & Poor's and Fitch Ratings. Moody's Investors Service assesses the nation at A3. All are the fourth-lowest investment grades and are higher than Indonesia's.
Malaysia's five-year credit-default swaps have fallen to 155 basis points this year, CMA prices show. They rose to 247 in September, the most since March 2009. The government's foreign- currency debt accounted for just 3.4 per cent of the total as of the end of 2015, according to a report by Moody's on Monday.
"Investor sentiment is strengthening from the accommodative interest-rate stance from central banks and recovering oil prices," said Angus at RHB. "Malaysia's favourable low external debt position will result in strong demand from both domestic and offshore investors."