Malaysia's global sukuk sale plan shows 1MDB concern fading

[KUALA LUMPUR] Malaysia's decision to press ahead with its first dollar sukuk since 2011 reflects investor appetite for yields at an eight-month high, as the government limits the fallout from the break up of a state investment company.

The Southeast Asian nation plans to sell as much as US$2 billion of Islamic notes and has hired HSBC Holdings, Standard Chartered Bank Plc and CIMB Investment Bank Bhd. to arrange the global offering, according to people familiar with the matter. The yield on Malaysia's 2021 US currency sukuk, one of three outstanding, rose to 3.17 per cent last week, the highest since July and up from a two-year low of 2.59 per cent in October, data compiled by Bloomberg show.

The government provided 1Malaysia Development with a US$257 million standby credit facility this month, helping allay investor concern that the company would default after delaying a loan repayment. As markets welcomed the planned unwinding of 1MDB's businesses, state oil company Petroliam Nasional Bhd. sold a record amount of dollar bonds last week even amid a plunge in oil prices.

"The government will be able to use the Petronas sale as a proxy to price its sukuk," Jesse Liew, Kuala Lumpur-based head of global Islamic bonds at BNP Paribas Investment Partners Malaysia, which has more than $900 million of assets, said by phone Monday. "1MDB's debt concerns won't be much of an issue as they are already factored in by the market." Petronas Pricing Petronas, as Malaysia's oil company is known, sold a total of US$5 billion of both Islamic and conventional notes on March 11, attracting bids for US$12 billion. The US$1.25 billion portion of five-year sukuk was sold to yield 110 basis points, or 1.10 percentage point, more than US Treasuries, compared with the market spread of 137.

Brent crude fell 2.3 per cent Monday to US$53.44 a barrel, about half of what it was in June. The government of Asia's only major exporter of oil raised its 2015 fiscal-deficit target and cut the economic growth forecast because of the loss in revenue.

The ringgit has slumped 13 per cent in the past six months, the worst-performing currency in Asia, according to data compiled Bloomberg. It fell to 3.7190 a dollar on March 11, the weakest in more than six years.

Malaysia has US$1.25 billion of 3.928 per cent US currency sukuk maturing in June. The yield spread on the 2021 notes was 122 basis points, below the year's high of 129. The nation, home to the world's biggest Islamic debt market, doesn't have any conventional global bonds.

"Demand for the planned Malaysian sukuk should be good as it will replace the debt that's maturing," Wan Kamaruzaman Wan Ahmad, the chief executive officer at Kumpulan Wang Persaraan (Diperbadankan), the second-biggest Malaysian pension fund with US$27 billion in assets, said by phone Monday in Kuala Lumpur. "I would buy the Malaysian sukuk as the government is not a frequent issuer and isn't raising funds for 1MDB." Fitch Ratings warned in November that 1MDB had become a contingent liability on the sovereign's A- rating, the fourth lowest investment grade. The state investment company has drawn criticism from lawmakers because of its rising borrowing, with debt totaling 41.9 billion ringgit (US$11.3 billion) as of March 2014. It repaid the US$563 million overdue loan in February.

The Kuala Lumpur-based company won't undertake any new investments or projects, will set up standalone entities for its two major property developments and will raise cash from selling its power business over the next 12 months, according to a February statement.

In a sign of improving confidence, the cost of insuring Malaysia's debt for five years using credit-default swaps has dropped to 137 from a four-month high of 151 in January, CMA prices show. That's up from the five-year average of 101.

The Malaysian and Petronas sukuk will help add momentum to global Islamic bond sales that are in the worst start to a year since 2010. Worldwide issuance totals US$4.8 billion, down from US$9.7 billion a year earlier, and reached US$46.4 billion in 2014.

"The fact that the country's credit-default swaps have fallen is also a positive sign," Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed-income analyst at CIMB Investment Bank, said by phone Monday. "The Petronas offering will set a benchmark for Malaysian issuers looking to sell dollar notes this year."

BLOOMBERG