The stars are aligning for Malaysia just as the government is seen raising $1.5bn in the Islamic debt market.
The planned sale coincides with a gain of more than 10% in the ringgit this year as a pickup in crude prices boosts finances for the oil exporter and pushes down bond risk from a seven-year high. The rally in Malaysian markets has so far withstood a probe into Prime Minister Najib Razak’s involvement in state investment company 1Malaysia Development Bhd, which has made progress in selling off assets to repay debt.
“The Malaysian name was oversold last year because of the combination of concerns over 1MDB, the commodity rout and expectations of a US interest-rate hike,” said Edward Iskandar Toh, chief investment officer for fixed income at Areca Capital, which oversees 500mn ringgit ($129mn) in Kuala Lumpur. “But these factors are less prevalent now. Political risk in Malaysia is also not seen as critical at this point.”
The marketing of as much as $1.5bn of global notes started on Monday and they will likely have maturities of 10 and 30 years, according to two people familiar with the matter, who asked not to be identified because the information is private. JPMorgan Chase & Co, CIMB Group Holdings, Malayan Banking and HSBC Holdings have been selected as arrangers.
1MDB repaid 950mn ringgit in debt to the government last week after completing the sale of its power assets to China General Nuclear Corp for 9.83bn ringgit in March. The state company won’t have any short-term debt and bank loans once it has settled a total of 6bn ringgit in the coming weeks, its president Arul Kanda said in an interview on March 30.
Even so, transcripts from a Malaysian parliamentary hearing into the state investment firm highlight the prime minister’s involvement in decisions on questionable transactions that bypassed the board of directors and finance ministry. The documents from the committee’s probe of 1MDB are a blow to Najib’s efforts to halt months of political attacks and to draw a line under allegations of irregularities surrounding the fund.
Malaysia raised $1.5bn when it last sold US currency sukuk in April 2015, its first international bond since 2011. It got orders for $9bn. When Indonesia issued $2.5bn last month across five- and 10-year maturities, subscriptions totalled $7.7bn.
Malaysia sold 10-year Shariah-compliant bonds to yield 3.04% and 30-year debt at 4.24% last year. The yield on the shorter-maturity notes has declined 62 basis points in 2016 to 2.99%, while that on the 2045 debt fell 76 basis points to 3.95%, data compiled by Bloomberg show.
The nation may have to offer a premium of 125 to 150 basis points over similar-maturity US Treasuries for a new 10-year sukuk, said Angus Salim Amran, the Kuala Lumpur-based head of markets at RHB Investment Bank Bhd., the country’s third-biggest Islamic bond arranger. That’s equivalent to 2.99% to 3.25% based on current market yields.