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Tenaga's US$3 billion global-sukuk plan to kickstart fading market

Malaysia's biggest electricity company plans to breathe some life into the global Islamic bond market with a US$3 billion issuance program after offerings slumped to a five- year low in 2015.

[KUALA LUMPUR] Malaysia's biggest electricity company plans to breathe some life into the global Islamic bond market with a US$3 billion issuance program after offerings slumped to a five- year low in 2015.

Tenaga Nasional Bhd is asking bankers to submit pitches for the planned sale, according to people familiar with the matter, and proceeds will be used to fund overseas investments including the purchase of a 30 per cent stake in Turkish power firm Gama Enerji A.S. for US$243 million. Offerings of global sukuk fell 28 per cent to US$34.8 billion last year, data compiled by Bloomberg show.

The power company's issuance will be Malaysia's first since the Federal Reserve raised interest rates in December. Tenaga last issued dollar-denominated debt in 1996, selling 100-year conventional notes.

The ringgit sank 19 per cent versus the dollar in 2015, Asia's worst performance, as tumbling crude oil prices, an investigation into political donations received by Prime Minister Najib Razak and troubles at debt-ridden state investment company 1Malaysia Development Bhd dented investor confidence.

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"Timing is everything and Tenaga's plan is telling people the ringgit won't depreciate too much from here and that it will stand to benefit from the debt sale," said James Lau, a Kuala Lumpur-based investment director at Pheim Asset Management Asia Bhd overseeing US$300 million.

"1MDB's problem is more of a governance issue, which shouldn't affect Tenaga's financials or borrowing costs."

Mr Najib, who chairs 1MDB's advisory board, said last week the company will have trimmed its debt by 40.4 billion ringgit (S$13.2 billion), from 42 billion ringgit in March 2014, once it completes the ongoing disposals of its power and property assets.

Malaysia's CIMB Group Holdings Bhd, the top sukuk arranger worldwide for seven of the last nine years, predicts a pickup in sales this year to at least US$40 billion. Offerings of the global securities, which pay returns on assets to comply with Islam's ban on interest, fell in 2015 from US$48.5 billion in 2014, data compiled by Bloomberg show. Issuance was a record US$50.1 billion in 2012.

Bankers' proposals for Tenaga's programme have to be submitted by the end of this week, the people familiar said, asking not to be identified because the process isn't public. The utility's Chief Financial Officer Fazlur Rahman Zainuddin declined to comment when contacted on his mobile phone.

Tenaga plans to add 5,000 megawatt of regional capacity as part of a five-year expansion, Chief Executive Officer Azman Mohd said in a Dec 14 statement. That's sufficient to power 12.5 million Malaysian homes.

The electricity company has a market capitalization of 74.6 billion ringgit and a total installed capacity of 10,818 MW. It sold the country's third-biggest sukuk in November - an 8.98 billion ringgit offering - to part-finance the construction of a 2,000 MW coal-fired power plant.

Tenaga is rated BBB+, the third-lowest investment grade by Standard & Poor's and Fitch Ratings. The yield on the company's existing conventional dollar bonds due 2025 climbed 31 basis points last year to 4.39 per cent and was at 4.35 per cent on Tuesday, data compiled by Bloomberg show.

Were five-year notes to be included in Tenaga's coming sukuk programme, the securities would be "considered attractive" at a yield of 160 basis points above similar-maturity US Treasuries, according to Maybank Islamic Asset Management Sdn. The yield on US government debt of that maturity jumped 40 basis points to 1.76 per cent in the fourth quarter. It was at 1.74 per cent on Tuesday.

"The sooner the better for Tenaga to tap the dollar sukuk market as we expect borrowing costs to rise," said Syhiful Zamri Abdul Azid, chief investment officer at Maybank Islamic Asset Management, who helps oversee 17 billion ringgit in Kuala Lumpur. "We are always on the lookout for primaries and if the price is right at the point of issue, we are most likely to participate."