1Malaysia Development Bhd., the sovereign wealth fund whose debt tripled in two years, is considering selling 1.5 billion ringgit ($461 million) of sukuk, according to two people with knowledge of the plan.
The proceeds will be used to finance the relocation of an air-force base in Sungai Besi in Kuala Lumpur, said the people who asked not to be named because the information is private. 1MDB agreed to take over the redevelopment of the site from the government in June 2011 on condition it would pay to build a new military air base in the state of Negri Sembilan, located south of the capital, according to a June statement.
1MDB is turning to the ringgit-denominated Islamic debt market for only the second time since 2009, after raising $6.5 billion in the past two years through dollar bond sales managed by Goldman Sachs Group Inc. (GS) The U.S. investment bank won’t be involved in the latest offering, the people said. The sovereign wealth fund came under scrutiny in parliament in July due to its rising debt and for singling out Goldman as the sole arranger.
Shahriza Embi, the wealth fund’s senior vice president of corporate communications in Kuala Lumpur, said in an e-mail today that 1MDB has a policy not to comment “on market rumors and speculation.”
1MBD sold 5 billion ringgit of 30-year Shariah notes in 2009 paying a coupon of 5.75 percent at a time when there were no Malaysian sovereign bonds of a similar maturity that could be used as a pricing benchmark. The securities, which are state-backed and rated A3 by Moody’s Investors Service, the seventh-highest investment grade, yielded 4.83 percent yesterday.
“Details of the debt plan will draw attention given what happened before,” Chua Hak Bin, a Singapore-based economist at Bank of America Corp., said in a telephone interview. “While the debt could be guaranteed by the government, 1MDB will probably have to pay higher borrowing costs for the sukuk amid rising concerns over the company’s financial position.”
The fund has total bonds and loans outstanding of 30.8 billion ringgit, according to data compiled by Bloomberg. The company’s most recent annual report shows it had 7.8 billion ringgit of debt at the end of March 2012.
The government sold its first ever 30-year securities in September at a yield of 4.935 percent, according to the central bank’s website. The notes were paying 4.7 percent today, data compiled by Bloomberg show.
Goldman made about $500 million in commissions and trading gains for managing the series of dollar bond sales, a person familiar with the matter said on May 9. That’s equivalent to what Malaysia pays each month on its debt.
The government had 502 billion ringgit of outstanding borrowings at the end of 2012 and debt servicing charges last year were 19.5 billion ringgit, or about $500 million a month, according to data published on the central bank’s website.
1MBD was formerly known as the Terengganu Investment Authority that was created in 2009 to invest oil royalties from the northern state of Terengganu. Prime Minister Najib Razak, who is chairman of the company’s advisory board, changed the name later that year and transformed it to a state-owned enterprise. It now obtains funding from sales of government-backed debt instead of income from oil.