This article first appeared in The Edge Financial Daily on January 24, 2020

KUALA LUMPUR: Top Glove Corp Bhd is issuing perpetual sukuk to raise RM3 billion to refinance its existing borrowings and for working capital purposes.

In an announcement to Bursa Malaysia, the world’s largest rubber glove maker said its wholly-owned subsidiary TG Excellence Bhd has, on Wednesday, lodged a RM3 billion perpetual sukuk programme with the Securities Commission Malaysia.

“The proceeds are intended to be used to refinance existing financing or debt obligations, repay inter-company borrowings and finance working capital requirements, investments, acquisition, capital expenditure or its general corporate purposes,” said the announcement.

The sukuk, which is guided under the Shariah principle of Wakalah Bi-Al Istithmar, is guaranteed by Top Glove and has been assigned an AA-IS(cg) rating by the Malaysian Rating Corp Bhd (MARC), with the group’s corporate credit rating being AA2.

Both the group’s credit rating and the rating assigned to its new sukuk programme carry a stable outlook.

The glove manufacturer’s short-term borrowings swelled to RM1.19 billion in the first financial quarter ended Nov 30, 2019 (1QFY20) from RM918.3 million a year ago. Its long-term debts were at RM1.305 billion in 1QFY20 versus RM1.379 billion the year before.

Top Glove’s gearing ratio was approximately 0.96 times as at Nov 30, 2019.

The fresh fund raised will come in handy to pare down its ballooning short-term debts.

“In the long run, the group needs the capital for expansion, and the sukuk is one way of raising funds,” said a fund manager when contacted.

“If the [expansion projects] from the sukuk could produce a good result, and they foresee their margins being higher than the cost of borrowing, the sukuk can be beneficial,” he explained.

Perpetual bonds are a fixed income security with no maturity date. Such financial instruments usually provide the subscriber with a contractual right to receive interest at a fixed rate for an indefinite future.

It has been a debate whether perpetual bond papers should be recognised as debt or equity.

Perpetual bonds in Thailand are expected to be reclassified from equity to liabilities in financial statements as a result of changes on several new accounting standards and principles are set to take effect this year.

Such a move will result in an increase in the debt-to-equity ratio for issuers. Furthermore, there will be ripple effect on the issuers, potentially leading to a breach of debt covenants and, ultimately, prompting banks to call in all outstanding loans.