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Jumbo sukuk swells Malaysia's infrastructure bond pipeline

[SINGAPORE] The Pan-Borneo Highway in East Malaysia, a jumbo project estimated to cost 27 billion ringgit (S$9.16 billion), is finally starting to take shape as the federal government prepares to launch initial funding to kick off formal construction.

A group of banks has been selected for the first issue. Although names have not been disclosed as the mandate has yet to be formalised, the group includes the four top Malaysian lender - CIMB, AmInvestment Bank, Maybank and RHB.

The appointed banks are working to finalise a 13 billion ringgit Islamic MTN programme to fund initial works.

About 60 per cent of the project will eventually be funded with proceeds from ringgit-denominated Islamic bonds to be issued through federal government funding vehicle DanaInfra Nasional. DanaInfra is a regular issuer, having raised funds for government-owned mass rapid transit projects.

The first batch of bonds, wrapped with a federal government guarantee, is expected to raise around 10 billion ringgit. Launch is timed for August or September, prompting other issuers to rush their deals to the market ahead of it.

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Over the next two weeks, investors expect a 1.8 billion ringgit issue from Jamabatan Kedua, a 3.64 billion ringgit project bond from DUKE 3 and a 5.45 billion ringgit sukuk from Sarawak Hidro.

Others in the queue are Perbadanan Tabung Pendidikan Tinggi Nasional, which aims to sell 2 billion ringgit of sukuk, Lembaga Pembiayaan Perumahan Sektor Awam, planning a 7-10 billion ringgit debut, CIMB Bank, with a pending 1.35 billion ringgit Tier 2 and Maxis Broadband, looking to issue off a 10 billion ringgit programme.

The crop of deals, amounting to some 37 billion ringgit including the Pan-Borneo highway, is expected to be easily absorbed given that many of them are government-guaranteed or government-related offerings.

Despite the long-running controversy over 1MDB, Prime Minister Najib Razak has consolidated his control over the government in the past months, following a two-thirds win for the ruling coalition Barisan Nasional in Sarawak in May.

In the face of the low supply of corporate bonds this year, local investors have tended to ignore the 1MDB saga. The main challenge, said investors, would be how the deals would price against declining interest rates.

Last Wednesday, Bank Negara Malaysia surprised the markets with a 25 basis points cut in benchmark rates, causing a sharp fall in yields on Malaysian government securities. The 10-year MGS yield tumbled 14bp over two days to 3.52 per cent on Thursday.

The drop was on top of a 21bp decline since the Brexit vote on June 23.

"It will be challenging to price the deals, especially since yields have tumbled so much," said one head of DCM syndicate.

"Prior to the UK vote, the average spread was around 50bp for 10-year government-guaranteed paper. For sure, investors will now ask for more." Given the high profile of the Pan-Borneo highway, DanaInfra is expected to indulge investors' urge for yield.

The 2,239km highway, running from Sarawak to Sabah, is a major plank in Mr Najib's Ninth Malaysia Plan. Much of the work will involve upgrading and expanding sections of an existing trunk road, with new roads to run off to connect towns for economic benefits to spread to rural areas.


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