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Friday September 21, 2012

Corporate sukuk outperforming sovereign

KUALA LUMPUR: Malaysia’s corporate Islamic bonds are returning twice as much as government sukuk this quarter as economic stimulus spending boosts investors’ risk appetite.

The Bloomberg-AIBIM Bursa Malaysia Corporate Index, a benchmark started this week that tracks 57 local-currency issues, gained 1.6% since June 30 to 101.062, while a similar gauge for sovereign notes rose 0.7% to 109.165. Global dollar-denominated syariah-compliant debt advanced 2.3%.

Sukuk issuance by Malaysian companies increased 59% in 2012 to RM50.8bil, spurred by corporations taking part in the Government’s US$444bil development programme. Inflows to emerging-market bond funds have surpassed last year’s total, as central banks in Japan, the United States and Europe pumped cash into their financial systems.

“Global stimulus has helped strengthen sukuk appetite in Malaysia,” Zakariya Othman, head of Islamic ratings at RAM Ratings Services Bhd, said in an interview in Kuala Lumpur on Wednesday. “Foreign investors are keen on Malaysian bonds and sukuk because they give decent returns and offer investors an opportunity to diversify their debt portfolio.”

Bond funds in developing economies have attracted more than US$36bil this year, compared with US$17bil for the whole of 2011, according to US-based research firm EPFR Global. The Bank of Japan unexpectedly expanded an asset-purchase plan on Wedneday, days after the Federal Reserve announced a third round of so-called quantitative easing.

Borrowing costs for top-rated companies in Malaysia dropped 30 basis points, or 0.30 percentage point, to 4.33% this year, the lowest level since 2003, according to a central bank index. Sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, are set for the best quarter of 2012. Issuance in the world’s biggest market for the debt reached an all-time high of RM75.6bil in 2011.

Overseas investors increased ownership of government and corporate debt in 2012 to record levels. Foreign holdings totalled RM198bil in July, 6.3% more than the same month in 2011 and exceeding the previous all-time high of RM191bil reached in March, Bank Negara figures show.

“This is going to be another great year for sukuk,” Mohamad Safri Shahul Hamid, deputy chief executive officer at CIMB Islamic Bank Bhd, a unit of CIMB Group Holdings Bhd, said in an interview in Kuala Lumpur. “Low borrowing costs and strong demand are supportive factors.”

Rafe Haneef, CEO of HSBC Amanah Malaysia Bhd, said the increasing supply could eventually put a strain on the market, particularly with bigger issues related to the Government’s spending plans to build roads, railways and power plants over the next decade.

“It will reach a point soon where the liquidity will be a constraint,” Kuala Lumpur-based Rafe said in an interview. “We’re seeing a lot of bumper issues coming up, with more construction-related and project finance sukuk, which will have longer tenors and bigger sizes,” he said, declining to give details.

Yields on syariah-compliant bonds declined 43 basis points in the international market this quarter to 3.01% and reached a record low of 2.97% on Sept 14, as the Fed announced its bond-purchase plan, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference between the average and the London interbank offered rate, or Libor, narrowed 42 basis points to 198 basis points.

Returns on Islamic debt have lagged behind non-syariah-compliant securities in the developing market, where bonds gained 6.4% this quarter, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

Malaysia’s borrowing costs in the dollar sukuk market also reached an all-time low. The yield on the 3.928% notes maturing in 2015 has fallen 39 basis points to 1.48% since June 30, according to data compiled by Bloomberg. The difference between that bond and Dubai’s 6.396% debt due November 2014 shrank 46 basis points to 116 basis points. — Bloomberg

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