Kuala Lumpur: Malaysia’s top sukuk arrangers are predicting domestic sales in 2012 will surpass last year’s all-time high as record-low borrowing costs and the government’s $444 billion (Dh1.63 trillion) spending programme drive issuance.
Offerings of ringgit notes reached 30.8 billion ringgit ($36.03 billion) this year, compared with 75.6 billion ringgit ($88.43 billion) in 2011. CIMB Islamic Bank Bhd., the second-biggest debt manager in the past seven months, has 15 billion ringgit ($17.55 billion) of deals in the pipeline, according to Chief Executive Officer Badlisyah Abdul Ghani. His counterpart at Maybank Investment Bank Bhd., the top arranger, says Prime Minister Najib Razak’s development plan is boosting sales from companies building roads and railways.
Yields on Malaysia’s top-rated Shariah-compliant securities due in 2022 have dropped 29 basis points since December to 4.37 per cent, below the 2011 average of 4.89 per cent and a high of 5.6 per cent in August 2006, according to a central bank index. Standard & Poor’s and Moody’s Investors Service affirmed their investment-grade credit ratings for the nation, the world’s biggest sukuk market, in the past week.
“The pipeline in Malaysia is very, very healthy,” Kuala Lumpur-based Badlisyah, whose CIMB Islamic Bank is a unit of CIMB Group Holdings Bhd., said in an interview yesterday. “Issuers are taking advantage of low borrowing costs to sell sukuk to refinance loans and for capital expansion.”
Billion ringgit pipeline
Indonesia, which opened its first Islamic bank in 1992, nine years after Malaysia, is also seeing a revival in corporate sukuk sales. Issuance climbed more than fivefold in 2012 to 1.35 trillion rupiah ($142 million) as of June, compared with 200 billion rupiah for the whole of 2011, according to data from the Capital Market and Financial Institution Supervisory Agency. Offerings reached 2.3 trillion rupiah in 2008, an all-time high.
Malaysia is already having a record year for sales, with potentially about 20 billion ringgit of Shariah-compliant debt in the pipeline, according to data compiled by Bloomberg. The notes pay returns on assets to comply with Islam’s ban on interest.
Tanjung Bin Power Sdn., which owns a coal-fired plant in the southern state of Johor, is planning to sell 4.5 billion ringgit of sukuk to refinance debt, according to a July 24 e-mailed statement from RAM Rating Services Bhd. Syarikat Prasarana Negara Bhd., which operates an overhead rail network in the capital Kuala Lumpur, is looking to sell 4 billion ringgit to finance a line extension.
Shift to stocks
Some investors may start to switch out of bonds, including sukuk, and into stocks as yields are so low, according to Pankaj Kumar, chief investment officer at Kurnia Insurans (Malaysia) Bhd. based in Petaling Jaya near Kuala Lumpur.
The FTSE Bursa Malaysia KLCI Index posted its best month in July since February, rising 2 per cent. The gauge has gained almost 7 per cent this year, compared with 0.8 per cent for the whole of 2011, and reached a record high on July 19.
“There’s a shift coming from the fixed-income side, where returns are no longer justifiable and that’s why some funds are moving toward dividend-yielding stocks,” Pankaj said in an interview yesterday.
Global Islamic bonds have also rallied this year, driving yields to unprecedented levels. Average yields dropped 12 basis points, or 0.12 percentage point, this week to a record 3.16 per cent on August 2, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.
Dollar Sukuk rally
The securities returned 6.4 per cent in 2012, according to HSBC, while debt in developing markets climbed 12.2 per cent, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.
Malaysia’s dollar-denominated sovereign Islamic bonds rose for a fifth day, with the yield on the 3.928 per cent notes dropping 10 basis points this week to 1.69 per cent, according to data compiled by Bloomberg. That’s the lowest since the debt was sold in May 2010.
The difference in yields between the Dubai government’s 6.396 per cent securities due in November 2014 and Malaysia’s debt was little changed at 148 basis points today and widened four basis points from a week ago.
Growth in Malaysia’s Islamic finance industry is also providing lenders with excess cash to invest in debt, supporting demand for new issuance, according to Kuala Lumpur-based AmInvestment Bank Bhd., the third-largest sukuk arranger.
‘Hungry for sukuk’
Shariah-compliant banking assets grew 24 per cent to $137 billion last year, or 22.4 per cent of the total, the central bank said in its annual report providing the latest figures.
Malaysia’s SME Bank, a state-owned financial institution, sold 500 million ringgit of Islamic bonds on August 2 that attracted 2.5 billion ringgit in orders, Managing Director Mohd Radzif Mohd Yunus, said in an interview in Kuala Lumpur.
“The strong demand shows that investors are still hungry for sukuk,” Mohd Radzif said yesterday.
Fitch Ratings reaffirmed the Southeast Asian nation’s rating at A-, the fourth-lowest investment grade and the same level as S&P, on Aug. 1 citing the country’s “track record of macroeconomic stability.”
Bank Negara Malaysia projects economic growth of 4 percent to 5 per cent this year, its annual report shows. Gross domestic product increased an average 5 percent in the four quarters ended March, data compiled by Bloomberg show. The ringgit is the fourth-best performing currency against the dollar this year among Asia’s 11 most active, strengthening 1 per cent.
“Sukuk sales can break the 2011 record if all the planned offerings in the pipeline come to market,” Mohd Effendi Abdullah, head of Islamic markets at AmInvestment Bank, said in an interview yesterday. “Corporates are likely to continue to tap the Malaysian market because borrowing costs are low and there’s still a lot of liquidity in the market.”