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Thursday August 30, 2012

Sukuk costs down, Prasarana gains

KUALA LUMPUR: Sliding sukuk costs mean Malaysia’s state-owned Syarikat Prasarana Negara Bhd is paying 20% less to finance railway expansion than China, which is building the world’s largest high-speed network.

Prasarana, which runs light-rail services in and around the capital Kuala Lumpur, sold RM1bil (US$321mil) each of 2022 and 2027 syariah-compliant notes to yield 3.77% and 4%, respectively, Mohd Zahir Zahur Hussain, the company’s finance director, said in an interview yesterday. China’s Railways Ministry issued 10-year non-Islamic bonds at a coupon rate of 4.68% on Aug 21 and 15-year securities at 5%, the Government’s debt clearing house website shows.

Government guarantees are lowering borrowing costs for companies involved in Prime Minister Datuk Seri Najib Razak’s US$444bil programme to build railways, highways, and power plants. China is paying more for its debt because of the risk the economy will slow too rapidly, while a shortage of sukuk is cutting yields in Malaysia, according to OSK-UOB Islamic Fund Management Bhd.

“Prasarana is able to pay lower yields than most corporates because of the explicit government guarantee,” Chan Cheh Shin, who manages RM850mil as head of sukuk at Kuala Lumpur-based OSK-UOB Islamic Fund Management, said in an interview yesterday. “China may be in for a hard landing.”

The company attracted orders for the 10-year portion of RM1.6bil and RM2bil for the 15-year notes, Mohd. Zahir said. The proceeds from the short-maturity debt will be used to refinance existing bonds and funds from the longer- tenor notes will go toward capital expenditure, he said.

Yields are falling in Malaysia even as sales increased 41% in 2012 to RM43.2bil from a year earlier, after reaching a record RM75.6bil in 2011, according to data compiled by Bloomberg. Islamic banking assets in Malaysia grew 24 % to RM435bil in 2011, central bank data show.

Average yields on the country’s top-rated 10-year corporate debt declined 31 basis points, or 0.31 percentage point, in 2012 to 4.35%.

Danainfra Nasional Bhd, formed to help finance the construction of a subway in Kuala Lumpur, sold 10- and 15-year Islamic bonds at 3.74% and 4.04% on July 10. The issuance attracted orders worth RM12.9bil for the RM2.4bil on offer, the company said in an e-mailed statement on July 10.

Prasarana sold RM2bil of sukuk, which pay returns on assets to comply with Islam’s ban on interest, at a previous sale in July 2011 to fund the expansion of two existing overhead lines in Kuala Lumpur.

The 10-year notes, which were issued at a coupon rate of 4.15%, yielded 3.74% on July 18, according to Bursa Malaysia. Prasarana sold the 15-year securities due in 2026 at 4.35%. The debt yielded 3.96% on Aug 14. Islamic bonds in the nation aren’t freely traded because of the supply shortage and are generally held to maturity.

“I’m interested in the Prasarana sukuk because they are long-dated, government guaranteed and fit in with the requirement of insurance companies,” Michael Chang, who oversees US$1bil as head of fixed income at Kuala Lumpur-based MCIS Zurich Insurance Bhd said in an interview yesterday.

“The company is also an established name.”

Global demand is also pushing down yields on Islamic bonds sold internationally. The average yield dropped 88 basis points this year to reach a record low of 3.11% yesterday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. — Bloomberg

The difference between average yields and the London interbank offered rate, or Libor, has narrowed 66 basis points in 2012 to 207 basis points, the HSBC index shows.

‘Comfortable’ Name

Islamic bonds sold globally have returned 6.9 % this year, according to the HSBC/Nasdaq index, while debt in developing markets climbed 12.8 %, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.

Prasarana may tap the Islamic bond market again toward the end of the year subject to gaining approval from the finance ministry and based on the company’s requirements, Mohd. Zahir said yesterday.

“The tenor of the Prasarana papers meet the requirements of pension funds and insurers,” Elsie Tham, a Kuala Lumpur- based portfolio manager for fixed income at Manulife Asset Management Sdn., who helps oversee $1 bil of assets, said in an interview yesterday. “Prasarana is a name that most people are comfortable with.”

--Editors: Simon Harvey, Sandy Hendry

To contact the reporter responsible for this story: Elffie Chew in Kuala Lumpur at echew16@bloomberg.net.

To contact the editor responsible for this story: Sandy Hendry in Hong Kong at shendry@bloomberg.net. 08-29-12 0010EDT

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