D-8 Witnesses Growth in Sukuk Market

Kuala Lumpur, Malaysia | May 24, 2010 by D-8 Secretariat

Malaysia may sell more than $600 million of five-year Islamic bonds, the country’s first overseas debt offering in almost eight years, according to Barclays Capital as the prime minister officially launched the sale.

D-8 Member Countries such as Malaysia, Indonesia & Egypt have seen remarkable growth in Sukuk Market in 2010

The Southeast Asian nation started to market the securities in Asia in middle of this month, with the roadshow set to end in New York on May 27, when the final size will be determined, said Steven Clayton at Barclays Capital Markets Malaysia, one of three arrangers along with HSBC Holdings Plc and Malaysia’s CIMB Group Holdings Bhd. Stops are also planned in Europe and the Middle East, a banker familiar with the deal said earlier this month.

Malaysia is tapping the international debt market for the first time since 2002 as the government aims to increase development spending to boost economic growth. Sales of notes that comply with the religion’s ban on interest rose 24 percent so far in 2010, the most in three years, as the European financial crisis bolstered demand for alternative investments in emerging markets.

Malaysia is “such a rare issuer, so that’s going to be a main global attraction,” said Rajeev De Mello, the Singapore- based head of Asian investment at Western Asset Management Co., which oversees about $482 billion.

‘Scarcity Value’

Barclay’s Clayton said today the size of the sukuk will probably exceed the last offering. Malaysia sold $600 million in its first overseas sale of Islamic notes in 2002, five-year securities that matured in July 2007.

“The global market is a little bit uncertain, but there’s a scarcity value attached to Malaysia, so we believe there’ll be high demand for this bond,” said Clayton, who is managing director for Malaysia.

Malaysia’s only outstanding debt is a 7.5 percent regular bond due in July 2011, which yielded 1.21 percent yesterday, 59 basis points less than at the end of last year, according to data compiled by Bloomberg.

“The global sukuk will set a new pricing benchmark not only for future sukuk issuances but also Malaysia’s conventional bond issues going forward,” Prime Minister Najib Razak said at briefing in Kuala Lumpur earlier last week.

Biggest Sukuk Market

Malaysia is the world’s biggest market for Islamic bonds, which are backed by physical assets and pay profit rates instead of interest. The nation accounted for 65 percent of the world’s outstanding sukuk notes in 2009, CIMB Chief Executive Officer Nazir Razak said at the same briefing today.

Yields on bonds in Greece, Portugal and Spain have surged as the countries struggle to rein in budget deficits, which are the largest in the European Union, and finance debt obligations. Greece will tap emergency loans from the euro region today to repay 8.5 billion euros ($10.5 billion) of 10-year bonds.

Malaysia had a budget deficit of 7 percent of gross domestic product last year, compared with 13.6 percent for debt- stricken Greece, 11.2 percent for Spain and 9.4 percent for Portugal. The $195 billion economy is forecast by the central bank to expand as much as 5.5 percent this year after emerging from its first recession in a decade in the fourth quarter. The prime minster plans to unveil a new five-year development plan in June.

‘Strong External Position’

“When there’s a drop in confidence in the traditional bond market, when there is concern with the traditional bond or traditional credits like in Europe, people look for diversification and therefore bonds from the Far East and Islamic bonds can get a better reception in this environment,” Nazir at CIMB Group, Malaysia’s top underwriter of sukuk notes last year, said yesterday.

The securities were assigned preliminary ratings of A- by Standard & Poor’s and A3 from Moody’s Investors Service, the fourth-lowest investment-grade rankings and the same as the sovereign.

The rating on the notes “reflects the strength of the transaction documentation, including the lease and purchase undertaking agreements,” S&P said in a statement released late yesterday. “Malaysia’s sovereign creditworthiness has been underpinned through the global crisis by its strong external position, deep and liquid domestic capital markets, and a strong and well managed financial system,” Aninda Mitra, Moody’s lead sovereign analyst for Malaysia said.

Egypt mulls sukuk regulations in Q2

Other D-8 Member Countries, Egypt, has planned to issue its first regulations governing sukuk or Islamic bonds, in the second half of this year, the financial regulator said earlier this month.

“There are currently no rules for sukuk, and this is part of a comprehensive programme to expand and deepen the fixed income market,” Ziad Bahaa Eldin, Head of the Egyptian Financial Supervisory Authority (EFSA), said in an e-mailed statement.

The authority will issue the regulations and apply them, he said, adding that it was premature to say how much financing potential an Egyptian Sukuk market would have.

“The potential is undoubtedly there, but difficult to accurately estimate at this stage,” he said.

Total global sukuk issuance was $19.1 billion (Dh70.15bn) last year, with Malaysia and Indonesia accounting for almost half, Thomson Reuters data shows.

Egypt has streamlined rules for both corporate and government instruments and hopes to set up a secondary bond market this year.

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