(Oct 16): Malaysia’s oldest Shariah-compliant lender is tapping the sukuk market for the first time, joining a rush among the nation’s Islamic banks to sell Basel III bonds before interest rates rise further.

Bank Islam Malaysia Bhd., established in 1983, set up a 1 billion ringgit ($305 million) program under the stricter capital standards, according to an Oct. 10 exchange filing. This year’s issuance of the debt totals 3.1 billion ringgit from five other lenders complying with religious tenets. Yields on the securities have fallen as sukuk supply falls short of demand.

Malaysian financial institutions are seeking to lock in borrowing costs as the swaps market signals the central bank will add to July’s first rate increase in three years. While sukuk sales climbed 90 percent to 48.7 billion ringgit this year, Islamic banking assets are at a record 581 billion ringgit, data from Bloomberg and the government show.

“Bank Islam will be tapping the market at a perfect time as investors are hunting for yields and such paper are in demand,” Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed- income analyst at CIMB Investment Bank Bhd., said in an Oct. 14 phone interview. “The bank will probably be able to price at competitive rates given the current low-yield environment.”

2019 Compliance

Lenders have until 2019 to comply with the Basel Committee on Banking Supervision guidelines announced after the 2008 global financial crisis. Bonds complying with the stricter ruling are typically sold at higher yields to compensate investors as they can be written down in the event regulators deem the issuer as non-viable.

The Basel III notes from Bank Islam are rated the fifth- highest investment grade of A1 by RAM Rating Services Bhd., the bigger of the country’s two assessors. That’s one level below the lender’s long-term rating. The debt program is for maturities of five to 30 years, the exchange filing said.

Bank Islam was bought out by BIMB Holdings Bhd. in December 2013, a purchase that was partly funded with Shariah-compliant bonds. BIMB is 54 percent-owned by Lembaga Tabung Haji, the state’s pilgrim fund that finances trips to Mecca in Saudi Arabia using its 43 billion ringgit in assets.

The yield on BIMB’s 1.5 percent securities due in 2023 climbed one basis point to 5.19 percent yesterday, after reaching a record high of 5.4 percent on Aug. 26, according to data compiled by Bloomberg.

Staying Away

AmIslamic Bank Bhd., a unit of Malaysia’s third-biggest sukuk arranger, kick started the nation’s sales of Islamic Basel III debt in February, followed between April and June by Maybank Islamic Bank Bhd., RHB Islamic Bank Bhd., Public Islamic Bank Bhd. and Hong Leong Islamic Bank Bhd. The coupons on the investment-grade notes ranged from 4.75 percent to 4.95 percent.

CIMB’s Nik Mukharriz said there’s a good chance that Bank Islam will be able to price its sukuk below 5 percent.

Elsie Tham, a senior fund manager at Kuala Lumpur-based Manulife Asset Management Services Bhd., said she’s not interested in Basel III sukuk.

“Personally, I think the risks for buying such debt are not fully reflected in their prices,” Tham, who oversees more than $1 billion, said in a phone interview yesterday. “This is more so in Malaysia where there is a shortage of Islamic instruments.”

CIMB Proposal

Malaysian sales of corporate sukuk, which pay returns on assets to comply with Islam’s ban on interest, are poised to surpass last year’s total of 49 billion ringgit. Issuance reached a record 95.8 billion ringgit in 2012 after highway operator PLUS Bhd. sold the world’s biggest ever offering of 31 billion ringgit.

Lenders that are yet to sell Basel III Shariah-compliant securities are CIMB Islamic Bank Bhd., Affin Islamic Bank Bhd. and Alliance Islamic Bank Bhd.

CIMB Islamic has proposed setting up a 5 billion ringgit sukuk program complying with the new guidelines, according to an Aug. 25 statement from Malaysian Rating Corp., which assigned the debt a preliminary rating of AA+, the second-highest investment grade.

Maybank Islamic issued its 10-year notes that are redeemable after the fifth year at a coupon of 4.75 percent in April. The bonds, which investors tend to hold until maturity because of the scarcity of sukuk, yielded 4.67 percent when last traded on Oct. 1, according to data compiled by Bloomberg.

RHB Islamic sold similar-maturity securities at 4.95 percent in May that were paying 4.86 percent on Sept. 26. Hong Leong Islamic’s 4.8 percent 2024 debt was at 4.74 percent on Aug. 6.

‘Keen Interest’

One-year interest-rate swaps in Malaysia have climbed five basis points, or 0.05 percentage point, to 3.74 percent since July 10, when the central bank raised its benchmark overnight policy rate to 3.25 percent, data compiled by Bloomberg show. The last meeting of the year is on Nov. 6

“We are inclined to view Bank Islam’s inaugural issuance with keen interest,” Khoo Poh Sim, a Kuala Lumpur-based senior portfolio manager at BNP Paribas Investment Partners Sdn., who helps oversee 554 million euros ($700 million), said in an Oct. 13 e-mail interview. “We believe there will be sufficient demand to anchor Bank Islam’s sukuk issuance as long as yields are enticing.”