Malaysia Sukuk Refinancing Window Opening as Fed Wavers on Rates
Malaysia’s two biggest banks are predicting a pickup in the country’s Islamic bond sales as companies try to refinance debt before the Federal Reserve raises interest rates.
Forecasts that the Fed will keep interest rates lower for longer have given local businesses a bigger window to refinance, according to Malayan Banking Bhd. and CIMB Group Holdings Bhd. MMC Corp., a Kuala Lumpur-based infrastructure firm, started marketing 1.5 billion ringgit ($358 million) of Shariah-compliant bonds to refinance non-Islamic loans this month, said Managing Director Che Khalib Mohamad Noh.
A successful sale by MMC will push local-currency issuance this quarter to 3 billion ringgit, nearly half the 7.2 billion ringgit total during the previous three months. An index of Malaysian corporate sukuk yields rated AA- has declined this month after rising the most since 2008 last quarter, while the ringgit posted its biggest surge in 17 years last week amid a rally in emerging-market assets.
“Now is a good time for corporates to tap the market,” said Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed-income analyst at the investment-banking unit of CIMB, Malaysia’s second-biggest lender by assets. “Issuers will be able to get better pricing” before the Fed raises borrowing costs, he said.
Khazanah Nasional Bhd., Malaysia’s sovereign wealth fund, kicked off third-quarter sukuk sales with a 1.5 billion ringgit offer last week that’s set to be issued on Oct. 19, according to people familiar with the matter who didn’t want to be named as the information isn’t public yet. The notes due 2022 were sold to yield 4.57 percent. Jimah Power East Sdn., a unit of state-owned utility Tenaga Nasional Bhd., is planning a 10 billion ringgit Islamic bond sale this month, people familiar with the offer said.
MMC, which has power, ports and construction divisions, hired RHB Investment Bank Bhd. as the lead arranger and manager. The offer has been rated AA-, the fourth-highest investment grade, by Malaysian Rating Corp.
The company, controlled by Malaysian billionaire Syed Mokhtar Al-Bukhary, has a market capitalization of 7 billion ringgit and is forecast to post a net income of 450.5 million ringgit in 2016, up from an estimated 384.8 billion ringgit in 2015, according to the average estimate of analysts surveyed by Bloomberg. Its share price has rebounded to 2.30 ringgit since closing at a six-year low of 1.57 ringgit on Aug. 24 and 25.
MMC’s port subsidiary Pelabuhan Tanjung Pelepas sold 310 million ringgit of six-year sukuk at a coupon rate of 4.36 percent in January 2014. The securities last yielded 4.12 percent on Aug. 7.
The average yield on Malaysia’s AA- rated corporate bonds due 2020 fell to 4.973 percent on Oct. 7 after climbing 18 basis points last quarter to 4.977 percent, the highest since January 2012, according to an index compiled by Bank Negara Malaysia. Theringgit surged 6.8 percent last week.
While borrowing costs have gone up, they’re still at a “decent level,” said MMC Managing Director Che Khalib.
“Our earnings outlook has improved and we think that there’s a good chance that we will get a rating upgrade,” he said. “The market is flush with liquidity and there’s a shortage of good quality paper.”
Malaysian banking assets that comply with Islam’s ban on interest expanded by an annual average of 17 percent in the five years through 2014 to 625.2 billion ringgit. Corporate ringgit sukuk sales, including Khazanah’s but not MMC’s, are at 33.1 billion ringgit so far this year, 35 percent less than the same period of 2014. The 7.2 billion ringgit of issuance in the third quarter was the least since 2010.
Malaysia’s expanding Shariah banking assets and a lack of good quality sukuk will ensure demand for MMC’s offer, said CIMB’s Nik Mukharriz.
There are 11.4 billion ringgit of Shariah corporate notes and 5.5 billion ringgit of Islamic and conventional loans set to mature by the end of March, according to data compiled by Bloomberg, which companies may choose to refinance before the Fed raises rates.
“Despite the volatility seen in the current market, yields are still attractive for issuers considering a sukuk issuance,” said John Chong, chief executive officer at Maybank Investment Bank Bhd., a unit of Malaysia’s biggest lender. “We expect to see pipeline deals continue to roll out.