Malaysia’s biggest oil-rig builder faces a double-whammy of collapsing crude prices and rising local borrowing costs as it plans to sell a debut sukuk.
Malaysia Marine and Heavy Engineering Holdings Bhd. has set up a 1 billion ringgit ($306 million) Islamic bond program to fund upgrading works at one of its facilities, according to an Oct. 14 statement from Malaysian Rating Corp. The company, which is indirectly owned by state-oil firm Petroliam Nasional Bhd., is tapping the market as the central bank considers whether to add to its first interest-rate increase since 2011.
A 24 percent slump in crude prices from this year’s peak threatens to crimp earnings from oil and gas services in Malaysia, which Prime Minister Najib Razak has earmarked as a hub for the region’s energy industry. Shariah-compliant debt sales have climbed 65 percent in 2014 to 50.3 billion ringgit from a year earlier and have already surpassed 2013’s total, data compiled by Bloomberg show.
“Rig builders such as MMHE will see their profits falling as oil majors are unlikely to continue pumping given current crude prices,” Lam Chee Mun, a Kuala Lumpur-based fund manager at TA Investment Management Bhd., which oversees about 680 million ringgit, said in an Oct. 27 phone interview. “Companies will have to pay more because borrowing costs are rising.”
MMHE is 66.5 (MMHE) percent-owned by the nation’s shipping company MISC, which in turn is 62.7 percent controlled by Petronas. The sukuk was given a preliminary AA- rating by Malaysian Rating, the fourth-highest investment grade, according to the statement. No details on the debt’s maturity or timing were provided.
Analysts are forecasting a drop in the company’s net profit to 170.5 million ringgit this year, from 236.4 million ringgit in 2013, according to the median estimate in a Bloomberg survey. Crude was at $81.72 a barrel today, compared with the year’s high of $107.26 in June, data compiled by Bloomberg show.
TA Investment’s Lam said MMHE may have to pay a yield premium of one percentage point more than Malaysia’s sovereign securities for its sukuk assuming it’s a five-year maturity.
Yields on the government’s Shariah-compliant debt have climbed since the central bank raised its benchmark interest rate to 3.25 percent from 3 percent in July. The swaps market is pricing in another increase ahead of the next meeting on Nov. 6, with one-year contracts at 3.75 percent.
The yield on the two-year sovereign sukuk was last at 3.49 percent, up from 2014’s low of 3.24 percent in February, while five-year debt yielded 3.81 percent from 3.77 percent in May, Bank Negara Malaysia indexes show.
James Lau, an investment director at Pheim Asset Management Asia Sdn., said MMHE will have to compensate investors for the risk from declining oil prices, the company’s slowing growth and rising borrowing costs.
“Investors will demand a premium,” Lau, who oversees $300 million in Kuala Lumpur, said in an Oct. 27 phone interview. “While investors can take comfort in Petronas being the ultimate parent, it wouldn’t be prudent to rely on that support as they are different entities.”
The Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index, a benchmark that tracks the most-traded local-currency notes, gained 2.3 percent this year to an all-time high of 107.51 after rising 2.8 percent in 2013.
Prime Minister Najib is seeking to boost the nation’s oil and gas industry as part of his $444 billion 10-year economic transformation program geared to achieving developed-nation status by the end of the decade.
MMHE has a market capitalization of 3.7 billion ringgit, data compiled by Bloomberg show. The company operates the largest fabrication yard in Malaysia with an annual offshore construction capacity of 129,700 metric tons, according to the statement from Malaysian Rating. It had an order book of 1.8 billion ringgit as of June, down from 2.6 billion ringgit at the end of 2013, the assessor said.
A joint venture started in July 2011 with Paris-based Technip SA has been awarded two contracts from Sabah Shell Petroleum Company Ltd. and Petronas Carigali, according to a Sept. 24 e-mailed joint statement.
“As long as the oil and gas industry continues to thrive, more companies are expected to tap the ringgit market,” Mohd. Effendi Abdullah, head of Islamic markets at Kuala Lumpur-based AmInvestment Bank Bhd., said in an Oct. 27 phone interview. “This is because the oil and gas industry, like infrastructure, has underlying economic activities that fit well with Shariah financing.”
Dubai: Islamic finance will become a norm rather than an alternative — as it currently is — in the near future, driving the growth of small and medium enterprises (SMEs) and Islamic trade, said leading Islamic banking professionals at the 10th World Islamic Economic Forum (WIEF) in Dubai on Wednesday
The opening session on the second day highlighted the importance of developing a standardised documentation process to facilitate the growth of Islamic trade finance.
In his keynote address, Hussain Al Qemzi, Board Member of the Dubai Islamic Economy Development Centre and CEO of Noor Islamic, said that SMEs play a large role in driving Islamic trade finance, adding that more advanced supply chain optimisation measures are needed to promote their growth.
At the panel discussion, Dr Adnan Chilwan, Chief Executive Officer of Dubai Islamic Bank, said that the potential for promoting Islamic finance among the Organisation of Islamic Cooperation (OIC) countries is tremendous and that Islamic finance and Islamic trade go hand in hand. “Islamic banking will not be an alternative but the norm of banking in the near future,” he added.
Muzaffar Hisham, Chief Executive Officer of Maybank Islamic Berhad, Malayasia, said that regulatory frameworks have a strong role to play in promoting Islamic finance, citing the strong growth in business between Malaysia, Indonesia and Singapore, following the introduction of governmental policies to promote trade. “The hurdles between policymakers must be cleared to boost Islamic trade finance,” he noted.
Arif Usman, General Manager, Global Head of Wholesale Banking, Abu Dhabi Islamic Bank, said that securing funding for start-up SMEs is a challenge, while Toby O’Connor, Chief Executive Officer, The Islamic Bank of Asia in Singapore, said that along with financial support, SMEs also need human support through adequate advisory services. Dr Chilwan pointed out that venture capital funding is practically lacking today for SMEs, despite the great emphasis that the region places on promoting the sector.
Clear cut policies for liquidity transfer among OIC countries and the emerging role of Islamic finance in Sub-Saharan and East African nations were also highlighted at the panel discussion, which concluded on the note of optimism that Islamic finance is growing in the right direction and will claim its share in global trade finance.
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