Malaysia’s transport binge to spur sukuk sales


Top underwriters expect a rebound from a four-year low

KUALA LUMPUR: Top underwriters see Malaysian corporate sukuk sales rebounding from a four-year low as Prime Minister Datuk Seri Najib Tun Razak ramps up spending to boost an economy forecast to grow at the slowest pace since 2009.

RHB Investment Bank Bhd, the second-biggest arranger of ringgit Islamic debt, sees issuance rising 7% to RM60.2bil in 2016, encouraged by Bank Negara’s monetary easing in July.

AmInvestment Bank Bhd, the fourth-largest, forecasts as much as RM70bil.

Sales of notes which comply with Koranic principles have picked up after Najib kicked off US$16bil of road and subway projects this year in partnership with the private sector. Ten-year Malaysian sovereign sukuk yields dropped to the lowest since 2013 this month amid analyst forecasts for 2016 economic growth to slow to 4.1%.

That gives issuers an incentive to seek funding before any Federal Reserve interest-rate increase boosts global borrowing costs.

“The conducive market environment for fixed-rate financing will likely lead to more corporates front-loading sukuk issuance in 2016 rather than face the risk of potentially higher funding costs in 2017,” said Angus Salim Amran, the Kuala Lumpur-based head of financial markets at RHB Investment Bank. “The unexpected cut in Bank Negara’s overnight policy rate in late July stimulated stronger demand for sukuk.”

Offerings of Islamic notes have climbed 69% to RM50.4bil this year, data compiled by Bloomberg show. Issuance fell to a four-year low of RM56.2bil in 2015 as a slump in oil prices damped growth in Malaysia and the Middle East.

Sales received a late boost when electricity company Jimah Power East Sdn Bhd issued RM8.98bil in December.

Bank Negara’s July rate cut pushed down the yield on 10-year Islamic government bonds to 3.56% this month, the lowest since June 2013.

A slew of infrastructure-related sukuk sales has revived Malaysia’s US$105bil corporate Islamic bond market. Public Sector Home Financing Board, which manages the provision of housing loans to civil servants, sold RM3.4bil of Government-guaranteed Islamic notes this month, while Lebuhraya Duke Fasa 3 Sdn. offered RM3.64bil of syariah debt in August to finance a highway in Kuala Lumpur.

In July, Jambatan Kedua Sdn, the state-owned concessionaire for a bridge linking northern Penang state with the peninsula, sold RM2.6bil of Islamic notes, while Sarawak Hidro Sdn, which manages the nation’s biggest hydropower dam, issued RM5.54bil of sukuk.

Fundraising is needed for construction of 1,800km of roads being built in Sabah and Sarawak. Other potential issuers include Prasarana Malaysia Bhd, which is financing a RM10bil extension of Kuala Lumpur’s light-rail network.

“There is good visibility of pipelines which are likely to materialise by the end of the year,” said Winson Phoon, a fixed-income analyst at Maybank Investment Bank Bhd. “Possible headwinds include unexpectedly hawkish policy by major central banks to the extent that it spooks markets and triggers a bond selloff in developed markets.”

Najib is spending on infrastructure after South-East Asia’s third-biggest economy was hit by weakness in oil and rubber exports. Some RM260bil has been allocated for development expenditure under the 11th Malaysia Plan covering 2016 to 2020, up 13% from the previous period.

“I don’t rule out the possibility of 2016 sales surpassing RM70bil because there is still a strong pipeline of issuers looking to lock in low borrowing costs,” said Mohd Effendi Abdullah, head of Islamic markets at AmInvestment Bank. “Corporates also have a lot more confidence to sell because they know there will be demand.” – Bloomberg


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