Ringgit sukuk issuance doubles as yields tumble to 16-month low

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KUALA LUMPUR (June 30): Islamic bond sales in Malaysia are set for the best quarter in more than a year as infrastructure firms take advantage of the lowest borrowing costs in 16 months.

State-owned DanaInfra Nasional Bhd. led companies in raising 17.9 billion ringgit ($4.7 billion) since March 31, compared with 8 billion ringgit in the first three months, data compiled by Bloomberg show. The yield on Malaysia’s top-rated 10-year debt sank to 4.59 percent on June 5, the lowest since February 2014, and was at 4.61 percent as of June 19.

Sales this year in the world’s biggest sukuk market will probably climb to the highest level since 2012 as Malaysian companies tap a record 625 billion ringgit of Islamic banking assets to fund Prime Minister Najib Razak’s plans for more railways and roads, according to CIMB Group Holdings Bhd. The top sukuk arranger in 2014 says companies will bring forward issuance to lock-in low rates before the Federal Reserve raises interest rates.

“The window to sell is between now and the end of the year,” said Badlisyah Abdul Ghani, the Kuala Lumpur-based chief executive officer at the Islamic banking unit of CIMB Group. “We have a healthy pipeline of companies looking to tap the market this year.”

DanaInfra, formed to finance the country’s subway project, asked bankers to submit proposals for a 40 billion ringgit Islamic debt program this month. SapuraKencana Petroleum Bhd. plans to sell 7 billion ringgit of such notes.

Issuance Outlook

Prime Minister Najib, who is pushing for higher spending to help Malaysia achieve its goal of attaining developed nation status by 2020, said in his October budget work will start in 2015 on projects valued at 75 billion ringgit.

This year’s sukuk issuance could surpass 70 billion ringgit, the highest since a record 109.5 billion ringgit in 2012, according to CIMB and and AmInvestment Bank Bhd., Malaysia’s fourth-biggest arranger of Islamic notes. RHB Capital Bhd., the top arranger this year, expects sales to be similar to last year’s total of 65.1 billion ringgit as a slowing economy prompts companies to review their spending plans.

Malaysia, which derives 22 percent of state revenue from energy-related sources, cut its 2015 economic growth forecast in January after crude oil prices dropped below $50 a barrel, less than half of their peak in June 2014. The ringgit has dropped 7.6 percent so far this year in Asia’s worst performance.

‘Momentum to Taper’

“The contraction in economic activity will prompt a review of corporate investment and financing plans,” said Angus Salim Amran, Kuala Lumpur-based head of financial markets at RHB Investment Bank Bhd., a unit of RHB Capital. “Issuance momentum is expected to taper off.”

Sukuk sales in the first six months totaled 25.8 billion ringgit, or 21 percent less than the 32.7 billion ringgit raised in the same period of 2014. The government sold 3 billion ringgit of Islamic bonds maturing in 2020 on Monday to yield 3.74 percent, attracting orders for 2.21 times the amount offered, central bank data show.

The yield on the ringgit-denominated five-year sovereign sukuk has fallen 18 basis points this year to 3.77 percent as of June 26, a Bank Negara Malaysia Index shows. The Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index, a benchmark that tracks the most-traded local-currency notes, climbed to a record 111.42 last week and was at 111.08 on June 26.

“Issuers will likely rush to sell sukuk as borrowing costs are still attractive,” said Mohd. Effendi Abdullah, Kuala Lumpur-based head of Islamic markets at AmInvestment Bank. “Demand will be also be strong because Islamic investors have very few alternatives for investing their money.”