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Saturday, 19 May 2012

Malaysia tax breaks spur sukuk rally

Malaysia’s efforts to become a global hub for Islamic finance by offering tax breaks is driving a record rally in foreign-currency sukuk, and arrangers say interest is increasing among local issuers. 

Standard Chartered Plc is in talks with about five companies to manage deals amounting to at least $1 billion, Leon Koay, the Kuala Lumpur-based head of global markets, said in a May 15 interview. The Bloomberg Malaysian Sukuk Ex-MYR Index, which includes notes of Khazanah National Bhd., is rising for a sixth quarter and has gained 9 percent since December 2010. 

Malaysia is seeking to strengthen its lead over the Persian Gulf in an industry that has more than $1 trillion in assets by exempting investors from capital gains taxes on non-ringgit sukuk through to 2014. Yields on state-owned Khazanah’s Singapore dollar-denominated bonds due in 2015 dropped 34 basis points this year to 2.26 percent, twice the pace of its similar- maturity local-currency securities that yield 3.52 percent. 

“Companies see sukuk denominated in currencies other than the ringgit as an alternative funding source” to expand their operations overseas, Mohd Effendi Abdullah, head of Islamic markets at AmInvestment Bank Bhd. in Kuala Lumpur, said in an interview yesterday. “The trend is rising.” 

Record in 2010 

AmInvestment Bank, the third-biggest sukuk arranger last year, said it’s receiving a growing number of inquiries from companies looking to sell foreign-currency Islamic bonds in Malaysia. 

Sales have reached $358 million this year, compared with $2.1 billion for the whole of 2011, which represented 6 percent of the $36.3 billion in local and foreign-currency issuance worldwide, according to data compiled by Bloomberg. There’s a good chance offerings of non-ringgit sukuk by local firms in the Southeast Asian nation will surpass 2010’s high of $2.5 billion next year, Effendi said. 

Yields on global Shariah-compliant notes, which pay returns on assets to comply with Islam’s ban on interest, have fallen this year on increasing demand and because of a shortage of new issues in which Islamic investors can park idle funds. Yields dropped 23 basis points, or 0.23 percentage point, to 3.76 percent in 2012, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The rate touched a five-month low of 3.58 percent on April 19. 

International sales of sukuk total $15 billion this year, compared with $6.1 billion in the same period of 2011, according to data compiled by Bloomberg. Issuance climbed more than two- fold last year, with Malaysia’s CIMB Group Holdings Bhd. the top arranger, while Standard Chartered was sixth. 

Ringgit Sukuk 

Khazanah, the country’s sovereign-wealth fund, sold $358 million of seven-year bonds convertible into shares at a negative yield in March. The company, which is rated A3 by Moody’s Investors Service, the fourth-lowest investment grade, also issued the first yuan-denominated Shariah-compliant notes in Hong Kong last year and S$1.5 billion ($1.2 billion) of five and 10-year sukuk in Singapore in August 2010. 

The company’s spokesperson Mohd Asuki Abas declined to say if the fund is considering more issuance of foreign-currency Islamic notes in an e-mailed statement on May 15. 

Adrian Khong, the head of treasury at OSK Investment Bank Bhd. in Kuala Lumpur, said some companies prefer to issue sukuk in ringgit instead of foreign currencies as they can tap the growing pool of cash in the country. 

Malaysia’s Islamic banking assets rose almost 24 percent to 435 billion ringgit ($140 billion) last year and accounted for 22.4 percent of the country’s total, the central bank said in its annual financial report on March 21. 

Cash Surplus 

Corporate sales of sukuk in Malaysia climbed 8 percent this year to 13.4 billion ringgit from the same period of 2011, after Tanjung Bin Energy Sdn. raised 3.3 billion ringgit in March in the biggest offering of 2012. Pembinaan BLT Sdn., a state-owned construction company, attracted demand that exceeded the 1.35 billion ringgit of sukuk on offer by 2.62 times, the company said in a statement a day after the March 27 sale. 

“There are so many funds that are long cash and short of assets,” Khong said. “All the recent corporate issuances have been very oversubscribed. There’s a lot of cash out there that’s chasing few assets.” 

Appetite for sukuk has driven down the yield premium investors demand over the London interbank offered rate this year. The gap narrowed 16 basis points to 257 basis points, according to the HSBC/Nasdaq index. Global Shariah-compliant bonds returned 3.3 percent in 2012, the gauge shows, while debt in developing markets climbed 4.7 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index. 

G-10 Countries 

Yields on Malaysia’s 3.928 percent dollar Islamic notes due 2015 increased two basis points to 1.97 percent today, according to data compiled by Bloomberg. The difference in yields between Dubai’s 6.396 percent sukuk maturing in November 2014 and the Malaysian bond narrowed two basis points to 229 basis points. 

Most of the planned non-ringgit Islamic bonds that Standard Chartered has in the pipeline are denominated in dollars and currencies of other Group of 10 nations, Koay said. 

Malaysia’s government and local companies will continue to issue non-ringgit denominated bonds to finance overseas operations, Soon Teck Onn, head of investment funds overseeing about $250 million at Kuala Lumpur-based Zurich/Malaysian Assurance Alliance Bhd., said in an e-mail yesterday. The country is rated A3 by Moody’s and A- by Standard & Poor’s, the fourth-lowest investment grades. 

“Foreign bonds offer an alternative and sometimes are a cheaper financing option for Malaysian issuers,” Soon said. “Malaysian foreign bonds have been well-received by overseas investors due to the country’s investment-grade standing.” - Bloomberg 

(Business Times / 17 May 2012)

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