May 20 (Bloomberg) -- Terengganu Investment Authority Bhd., the first wealth fund set up by a Malaysian state, will sell 30- year Islamic bonds and may issue securities backed by oil royalties to raise a combined 11 billion ringgit ($3.1 billion).

Terengganu Investment Authority will price 5 billion ringgit of Islamic bonds next week, officials at the fund said in an interview today. The bonds will be guaranteed by the Malaysian government, whose debt is rated A3 by Moody’s Investors Service, the seventh-highest investment grade.

The fund “won’t be rushing out to make risky investments” even as it seeks returns that are higher than its borrowing cost, Chief Executive Officer Shahrol Halmi, 38, said in a telephone interview from Kuala Lumpur. It is targeting annual returns of at least 15 percent, he added. “We have a very long-term view in terms of managing our capital.”

The fund hired AmInvestment Bank Bhd., the second-biggest arranger of Islamic bond sales worldwide this year, and Bank Islam Malaysia Bhd. to help it sell the securities to local and international investors. Officials declined to provide details on pricing.

“At this point in time, there’s tremendous interest in these bonds,” said Casey Tang, executive director for business development in the CEO’s office, who will oversee the fund’s projects.

Sustainable Income

Indonesia, Southeast Asia’s largest economy, raised $650 million from its first international sale of Islamic dollar bonds in April, after attracting orders for $4.7 billion. Islamic bonds, known as sukuk, comply with Shariah law by using asset returns to pay investors instead of interest.

Terengganu Investment Authority, which will be based in Kuala Terengganu, is also considering options to raise a further 6 billion ringgit, including selling securities backed by future earnings the state will receive in oil and gas royalties, the officials said.

Details are still being worked out and a decision hasn’t been made yet, said Shahrol, a Stanford University graduate who previously worked at consulting firm Accenture Ltd.

The fund is seeking to ensure sustainable income for Terengganu, the second-poorest state after Kelantan, should its oil and gas reserves run out. Companies including Exxon Mobil Corp. produce crude oil from projects off the coast of Terengganu. The state is also home to the Kertih refining and petrochemical complex of Petroliam Nasional Bhd., Malaysia’s state oil company.

Oil Reserves

The Terengganu Investment Authority, set up on Feb. 27, said it will manage the long-term oil revenue of the state, located on the east coast of peninsular Malaysia. Terengganu had a gross domestic product of 33 billion ringgit in 2007, of which 26 percent was non-oil related, according to the fund officials.

The fund plans to “to increase the small portion of non- oil related GDP,” said Tang, 44.

Malaysia’s King Mizan Zainal Abidin, who is also the sultan of Terengganu, proposed the setting up of the fund following a visit in February last year to Abu Dhabi, an oil-rich emirate which has the world’s largest sovereign wealth fund.

Terengganu Investment Authority plans to make investments with other sovereign wealth funds, including Abu Dhabi’s Mubadala Development Co., Qatar Investment Authority and Kuwait Investment Authority, the officials said.

It plans to invest in tourism, energy and agriculture projects in Terengganu and other parts of Malaysia, as well as those outside the country that would benefit the state.

Tourism

The fund also plans to develop partnerships with “world- class operators” in tourism projects and plans to make its first investment in the next three to six months on one of the islands off Terengganu, Shahrol said.

“To my knowledge, wealth funds manage the wealth of the state or country, not the debt,” said Sani Hamid, a director of wealth management at Financial Alliance Pte, a Singapore-based financial advisory firm. “Development projects don’t guarantee returns because three’s a social angle to it; you can’t maximize profits on development projects.”

The Malaysian government will get 10 percent of the Terengganu fund’s annual after-tax profits.

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net; Katrina Nicholas in Singapore at knicholas2@bloomberg.net

Last Updated: May 20, 2009 04:28 EDT