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Malaysia markets 10- and 30-year benchmark Islamic dollar bonds

[KUALA LUMPUR] Malaysia is selling global Islamic bonds in a benchmark offering against the backdrop of an increase in credit risk amid a dispute between a troubled state-investment company and Abu Dhabi's sovereign wealth fund over debt obligations.

The government is marketing Shariah-compliant notes due in 10 and 30 years at 135 to 140 basis points over Treasuries, and 145 to 150 basis points, respectively, according to a person familiar with the deal who asked not to be identified because the information is private.

Malaysia is tapping the market just as the ringgit has rebounded from its worst annual loss since the Asian financial crisis amid a stabilization in Brent crude prices. That's helped ease concern about a deterioration in the oil exporter's finances, which could put the nation's fiscal targets at risk. Foreign holdings of Malaysian government bonds climbed to a record in March as indications the Federal Reserve will take a gradual approach in raising interest rates bolstered demand for emerging-nation assets.

Malaysia's existing 10-year sukuk, sold in April 2015 at a coupon of 3.043 per cent, yielded 3.08 per cent late in Asia on Wednesday, while the 4.236 per cent securities due in 2045 were paying 3.96 per cent, data compiled by Bloomberg show.

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While sentiment for the ringgit improved, the cost to insure the nation's sovereign bonds increased to the highest level this month as the saga over 1Malaysia Development Bhd took on a new twist.

Abu Dhabi's sovereign wealth fund International Petroleum Investment Co said this week that 1MDB failed to make a payment of more than US$1 billion in connection with a loan it made last year. IPIC entered an agreement with the state firm in May 2015 to provide the Malaysian fund with the cash to settle some liabilities in exchange for a transfer of assets, as well as assume interest obligations on US$3.5 billion of debt.

The failure to repay the loan means 1MDB and its sole shareholder Malaysia's finance ministry are effectively in default, IPIC said in a filing to the London Stock Exchange. 1MDB's President Arul Kanda said in an interview with Bloomberg on Tuesday that the company is in dispute with IPIC and sees an "amicable resolution." It remains unclear who will honor the US$50 million interest payment on the bonds that was due on Monday and has a five-day grace period.

The threat of default is the latest episode in financial scandals that have rocked 1MDB, already a target of global investigations into allegations of money laundering and embezzlement. Authorities from the US to Switzerland are trying to determine if some of the billions of dollars that the company raised to buy energy assets were siphoned out inappropriately. 1MDB, whose advisory board is chaired by Prime Minister Najib Razak, has consistently denied any wrongdoing.

Five-year credit-default swaps on Malaysia's sovereign debt climbed to a six-week high of 163 on Wednesday, according to CMA prices. The contracts rose above 245 in September, the highest in more than six years.

The Southeast Asian nation has US$1.2 billion of Shariah-compliant dollar notes coming due in July. Malaysia raised US$1.5 billion from last year's sukuk, its first international bond issuance since 2011, and got orders for US$9 billion.