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Sunday, 4 October 2015

Malaysia sukuk drought seen easing this quarter

KUALA LUMPUR: Malaysian companies building railways and power plants under Prime Minister Najib Razak’s US$444bil development programme will help revive sukuk sales from the slowest quarter since 2010, said AmInvestment Bank Bhd.

Corporate issuance could rise to as much as RM60bil (US$13.5bil) for the full year, said Mohd Effendi Abdullah, head of Islamic markets at Kuala Lumpur-based AmInvestment Bank, after sales slumped to RM7.2bil in the third quarter. While the forecast would mark a pick-up from the RM31.5bil sold so far this year, offerings would still remain below levels for the past three.

More syariah-compliant bond sales are likely to be announced once the United States goes ahead with an expected interest- rate increase, removing an uncertainty that’s stifled issuance, said Mohd Effendi. Jimah Power East Sdn Bhd, a unit of the state electricity company, plans to sell RM10bil in October in what will be Malaysia’s third biggest sukuk sale of all time. DanaInfra Nasional Bhd, which is financing a new subway system in Kuala Lumpur, is due to announce a RM40bil programme in the fourth quarter, according to people familiar with the matter.

“The sukuk pipeline looks better now,” said Mohd Effendi at Malaysia’s third-biggest Islamic bond arranger of 2014. “If demand is healthy, this could encourage moreissuers to tap the market.”

Islamic bond sales in the world’s biggest market for the debt dropped 56% in the third quarter from the previous three months, according to data compiled by Bloomberg.
Issuance in the first nine months of 2015 declined 37% from a year earlier. Offerings totalled RM65.1bil last year.

“It’s a challenging time for arrangers and issuers,” said Mohamed Azahari Kamil, Kuala Lumpur-based chief executive officer of Asian Finance Bank Bhd, the Malaysian unit of Qatar Islamic Bank SAQ. “So long as the ongoing uncertainty in the local and global markets persists, sukuk sales are unlikely to pick up substantially.”

The United States refrained from increasing interest rates in September, keeping markets in limbo as to when it will tighten monetary policy. Fed officials have indicated they may make a move at either one of this year’s two remaining meetings, in October and December.

Prospects of higher US interest rates have drained capital from emerging markets and pushed up borrowing costs for bond issuers. In Malaysia, yields on top-rated, 10-yearconventional corporate notes climbed 25 basis points to a four- year high of 4.87% in the third quarter, a central bank index shows.

That was the biggest three-month increase since March 2014.

AmInvestment’s Mohd Effendi said sukuk issuers that need the funds will still go ahead with sales even if market conditions are tough because they can structure longer-maturity debt to appeal to pension funds and insurers.

Prime Minister Najib is farming out infrastructure projects to the private sector as well as government-linked companies. He is seeking to transform Malaysia into a developed economy by 2020 and announced last October that the nation will start work on projects valued at RM75bil this year.

“We expect large infrastructure and utility issuance in the fourth quarter, but sales are anticipated to be 25% lower than 2014,” said Angus Salim Amran, Kuala Lumpur-based head of financial markets at RHB Investment Bank Bhd, a unit of Malaysia’s fourth biggest sukuk arranger last year.

(The Star Online / 02 October 2015)

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China turns to Islamic finance to expand economic clout

Islamic finance is gaining prominence as a channel for China to expand its economic influence abroad as banks strengthen ties with Muslim-majority countries and Chinese companies start to tap offshore pools of Islamic funds.
With a Muslim population of about 20 million, China has little reason to develop Islamic banking at home. But there are powerful reasons for it to get involved in the sector overseas.
China wants to build stronger trade ties with Asian countries under its "One Belt, One Road" strategy to rebuild Silk Road trade links with Asia and Europe.
The network will include the world's main centers of Islamic finance, the Middle East and Southeast Asia, where sharia-compliant assets account for as much as a quarter of total banking assets.
"With 'One Belt, One Road', (Chinese) state-owned enterprises and private companies are now more willing to explore Islamic finance," said Hong Kong-based Ben Ping Chung Cheung, Asia Pacific head of consultancy Shariah Advisory Group.
The firm is advising conglomerate HNA Group [HNAIRC.UL] on what could be the first Islamic financing by a mainland firm: a $150 million deal to buy ships. HNA also plans an offshore issue of sukuk (Islamic bonds), Cheung said.
A railway project in the eastern province of Shandong is also exploring issuing sukuk to raise as much as 30 billion yuan ($4.7 billion) for a high-speed rail link, said Cheung.
If successful, such a deal would rank among the largest sukuk ever issued. Hurdles remain, however, as discussions were still preliminary and any financing would face stiff competition from domestic banks, Cheung added.
In July, Singapore-based adviser Silk Routes Financials said it had been mandated by a unit of state-owned Sichuan Development Holding Co to advise on Islamic financing options.
"There is certainly some momentum, a consequence of the large and growing trade links between China and the Gulf," said Jonathan Fried, a partner at law firm Linklaters in Dubai.
Such plans are ambitious as Chinese firms face a steep learning curve in Islamic finance, which obeys rules such as a ban on paying interest and uses formats that can be morecomplex than conventional finance.
For their part, Islamic investors have plenty of money to buy into dollar-denominated sukuk, but historically have tended to invest in top-rated issuers.
"The attraction would be if sukuk is cheaper for issuers, and clearly there are a lot of companies in China within the right industries, the right structures for it," said Kalai Pillay, head of North Asia industrials at Fitch Ratings.
At a governmental level, Chinese participation in Islamic finance may be mainly via the Asian Infrastructure Investment Bank (AIIB), a new multilateral lender backed by Beijing.
The AIIB has discussed using Islamic finance with the Saudi Arabia-based IslamicDevelopment Bank (IDB), two lenders which have 20 member countries in common.
Islamic deals could help AIIB differentiate itself from rivals such as the World Bank and Asian Development Bank.
China's state-owned banks are already raising their profile in the Gulf. In the past year, Agricultural Bank of China, Bank of China and Industrial and Commercial Bank of China (ICBC) have issued conventional bonds listed on NASDAQ Dubai.

"The next stage will be sukuk issuance by Chinese entities, facilitated and co-managed by these banks," said Fried at Linklaters.
(Reuters / 22 September 2015)
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