CIMB bullish on Malaysian Islamic bonds as oil recovers

KUALA LUMPUR, March 5 ― Malaysia’s corporate sukuk sales will rebound from the worst start to a year since 2010 as a recovery in oil prices spurs issuance before the US raises interest rates, according to the top arrangers.

Islamic bond offerings from the world’s biggest sukuk market total RM2.8 billion in 2015, down from RM9.7 billion in the year-earlier period, data compiled by Bloomberg show. Kuala Lumpur-based AmInvestment Bank Bhd predicts sales could surpass last year’s RM62 billion as more projects come on stream under the government’s 10-year development programme.

A 34 per cent rally in Brent crude from January’s six-year low will shore up the country’s finances after Fitch Ratings warned the loss of revenue for oil-exporting Malaysia puts its credit ranking at risk. The average yield on AAA rated Malaysian corporate securities dropped to a three-month low, cutting costs for issuers involved in Prime Minister Datuk Seri Najib Razak’s US$444 billion (RM1.6 billion) spending drive and those seeking to refinance debt.

“The rebound in oil prices gives a level of comfort to issuers and investors that things aren’t as bad as they thought,” Badlisyah Abdul Ghani, chief executive officer at CIMB Islamic Bank Bhd, a unit of the leading sukuk arranger, said by phone yesterday in Kuala Lumpur. “The increase in oil would help stabilise the country’s credit position.”

Record index

The supply shortage drove the Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index, which tracks the most-traded local-currency notes, up 0.8 per cent this year as investors sought to park a record RM581 billion of Islamic banking assets. The gauge declined 0.1 per cent yesterday from its unprecedented high on March 3.

The average yield on five year top-rated company bonds fell two basis points in 2015 to 4.25 per cent, according to a central bank gauge of non-Shariah-compliant debt. Sukuk sales in the pipeline from Malaysian companies total 12 billion ringgit, data compiled by Bloomberg show.

AmIslamic Bank Bhd, the Shariah-compliant unit of Malaysia’s fifth-biggest lender by market value, increased the size of its planned sukuk to RM1.2 billion after orders exceeded the RM750 million target amount, a person familiar with the matter said March 2. The issue date is tomorrow.

AirAsia Bhd, Bank Islam Malaysia Bhd and Axis Real Estate Investment Trust are among companies that have announced plans to sell Islamic bonds totaling RM5 billion.

‘External shocks’

“Sukuk sales look promising based on the deals in the pipeline,” Mohd. Effendi Abdullah, head of Islamic markets at AmInvestment Bank, Malaysia’s third-biggest sukuk arranger in 2014, said by phone Wednesday in Kuala Lumpur. Sales could exceed last year’s “as corporates are likely to tap the market before the Fed raises interest rates,” he said.

While issuance related to the government’s development programme will rise and support total sales this year, the local market is still vulnerable to the drop in oil prices, according to Standard Chartered Bank Malaysia Bhd.

“Unexpected external shocks such as oil-price gyrations may have a negative impact on local sales,” Leon Koay, managing director and country head of financial markets at Standard Chartered Bank Malaysia, part of the fourth-largest Islamic debt arranger, said by e-mail yesterday. “The pipeline, especially on the infrastructure side, is there but the timing appears to be fluid at this point.”

Rate policies

Prime Minister Najib said in his October budget that the nation will start work on further projects this year, such as those for highways and rail, valued at about RM75 billion, part of a 10-year plan to become a developed economy by 2020.

Bank Negara Malaysia meets today and all 19 economists surveyed by Bloomberg predict no change to the benchmark 3.25 per cent policy rate. The Fed has signaled it may start tightening in the second half.

The ringgit weakened in the last two days on speculation the central bank will follow the lead of India, which cut borrowing costs in a second unscheduled announcement following China’s weekend move. Morgan Stanley predicts 25 basis-point interest-rate cuts by Malaysia at both the next two meetings in March and May.

“Government-related projects will continue to lead new bond sales,” CIMB’s Badlisyah said. “The low borrowing costs and improved environment should support offerings.” ― Bloomberg