[KUALA LUMPUR] Malaysia's Tenaga Nasional Bhd is seeking to raise as much as 10 billion ringgit (S$3.6 billion) in an Islamic bond issue to develop a power plant project it is planning to take over from debt-laden state fund 1MDB, sources familiar with the matter said.
The bond by Malaysia's national utility would be the largest sukuk globally this year, a major boost for the sukuk market after issuance fell in the first quarter to its lowest point in four years.
The planned purchase of 1MDB's 70 per cent stake in 3B, a greenfield 2,000 MW coal-fired plant project, will take the pressure off 1MDB to find the funds to develop the project and help it focus on paring down debt of more than US$11 billion - a burden that has weighed on Malaysia's currency and its credit rating.
It also fits well with Tenaga's own energy supply needs, although some analysts are worried that the company may end up overpaying if the government pushes for 1MDB to gain the best deal it can.
Plans for the sukuk are still preliminary, two sources said. Tenaga, in which state investor Khazanah is the biggest shareholder, is looking at a single issue bond rather than a series and has approached several banks to court proposals, said one of the sources.
The sources declined to be identified as discussions about the bond proposal were confidential. A spokesman for Tenaga declined to comment.
The sum that Tenaga will pay 1MDB has yet to be determined as the two firms are still in talks. But Tenaga Chief Executive Officer Azman Mohd has defended the plan, saying his company would not pay a premium and asserting it was not bailing out 1MDB.
Tenaga's shares initially slid as much as 7 per cent late last week on news of the planned purchase but have since regained lost ground. They closed 0.3 per cent lower on Tuesday.
1MDB, whose board of advisers is chaired by Malaysian Prime Minister Najib Razak, won the rights to build 3B in 2014, beating out Tenaga and other bidders. But the state fund's liquidity problems put its ability to build the plant in question. Japan's Mitsui & Co owns the remaining 30 per cent of the project.
It is the first power asset to be disposed of by 1MDB, as the fund looks to wind down its businesses.
The cost of the 3B project has risen to around 11 billion ringgit from 10 billion ringgit, Thomson Reuters publication IFR quoted a banker with knowledge of the matter as saying. Banker and analysts have also said Tenaga won't just use debt to finance the project, with debt usually accounting for 75-85 percent of its project financing.
Daniel Wong, analyst at Kuala Lumpur-based Hong Leong Investment Bank, said Tenaga had little choice but to enter into talks as the project is crucial to its own and Malaysia's energy needs. "If they don't undertake it the project will face further delays and in a way Tenaga by 2018/2019 will face pressure in terms of power supply," he said.
Tenaga is also likely to be able to charge higher electricity tariffs than 1MDB under the terms of its proposed takeover by Malaysia's Energy Commission.
Tenaga's planned issuance for the project would surpass a US$2 billion sukuk by the Indonesian government last month. Global sukuk issues have slumped as weak oil prices have hit the economies of Malaysia and countries in the Middle East.