Malaysia's RM4.5b subway sukuk rescues quiet month for sales

[KUALA LUMPUR] The company financing the extension of Malaysia's subway under Prime Minister Najib Razak's US$444 billion development programme rescued Islamic bond sales from what would have been the worst month since February 2015.

Without DanaInfra Nasional's RM4.5 billion (S$1.5 billion) offering in May, corporate issuance from the world's largest sukuk market would have been just RM1.1 billion, data compiled by Bloomberg show.

The Shariah-compliant sale is Malaysia's biggest by a local company so far in 2016.

Issuance should start to pick up in the second half after Federal Reserve officials signaled they are ready to raise interest rates soon, clearing the uncertainty that's deterred borrowers, according to AmInvestment Bank Bhd. Companies building railways, water systems and power plants under Malaysia's infrastructure plan are among the top issuers of Shariah-compliant debt, with many of them government-backed.

"The market is reliant on government-guaranteed issuance as corporate issuance dissipates," said Angus Salim Amran, the Kuala Lumpur-based head of markets at RHB Investment Bank, the country's third-biggest Islamic bond arranger. "The government-guaranteed market has been pivotal toward addressing investor liquidity, which continues to outpace sukuk supply."

Angus predicts 2016 sales will rise to RM59.9 billion, surpassing the RM56 billion last year but still below 2015's RM65 billion. Lower-rated AA companies will also look to preempt further tightening by the Fed, he said.

The supply shortage is fueling a drop in yields to near a nine-month low, making it an opportune moment for companies to tap investors' money. The cost for AAA-rated corporates to borrow for 10 years is 4.63 per cent, down from a yield of 4.86 per cent at the end of 2015, according to a Bank Negara Malaysia index of conventional debt used as a gauge to price Islamic bonds.

Borrowing costs have remained low because of a lack of supply, said Edward Iskandar Toh, chief investment officer for fixed income at Areca Capital, which oversees RM500 million in Kuala Lumpur. "Most of the major buyers are pension funds and insurance companies and they tend to hold such bonds and sukuk to maturity."

Pengurusan Air SPV, a state-owned water asset management company, plans to sell RM1.4 billion of sukuk this month with an option to increase it, according to people familiar. DanaInfra may raise its government-guaranteed programme to RM60 billion by 2022 from RM46 billion, Principal Officer Nungsari Ahmad Radhi said in an interview in Kuala Lumpur last month. The company may tap the market two more times this year, he said.

Now that the uncertainty with the Fed's rate path is clearer, AmInvest is seeing a lot more issuers looking to come to market, said Mohd Effendi Abdullah, the Kuala Lumpur-based head of Islamic markets at the bank in Kuala Lumpur.

"We are in the midst of drawing up the documentation for some of them," he said.

BLOOMBERG