Perpetuals in Vogue as Malaysia Airports Sells: Islamic Finance

Malaysia Airports Holdings Bhd. (MAHB)’s plan to sell perpetual sukuk highlights rising interest in the debt from companies looking to shore up their balance sheets.

The manager of all of Malaysia’s 39 airports will hold an investor presentation for the offer on Aug. 25, two people with knowledge of the deal said last week. It will be the nation’s first sale of rated ringgit Islamic bonds with no set maturity following unrated issues by Malaysian Airline System Bhd. in 2012 and Boustead Holdings Bhd. in June. Boustead, a plantations company, sold the notes at 6.1 percent, 2.3 percentage points higher than its two-year non-Islamic debt at the time.

Perpetual bonds, which rating companies treat as equity, have been becoming more popular as they allow issuers to raise money without damaging their creditworthiness and offer higher yields to investors, Kevin Lim, RAM Ratings head of consumer and industrial ratings, said in an interview in Kuala Lumpur yesterday. Abu Dhabi’s Al Hilal Bank PJSC sold $500 million of perpetual sukuk in June, attracting around $5 billion of bids, the fifth such offer from the United Arab Emirates.

“The fact that Malaysia Airports is planning a rated perpetual sukuk suggests that investors are getting more sophisticated,” Mohd. Effendi Abdullah, head of Islamic markets at Kuala Lumpur-based AmInvestment Bank Bhd., the country’s third-biggest sukuk arranger, said in phone interview yesterday. “We are talking to a few companies that are keen to sell such debt.”

Income Dropping

Malaysia Airports will offer as much as 1 billion ringgit ($317 million) of perpetual sukuk, the two people who asked not to be named because the information isn’t public yet said in interviews on Aug. 15. It’s part of a previously-announced 2.5 billion ringgit Islamic bond program. Chief Financial Officer Faizal Mansor declined to comment on the latest offer when contacted by telephone yesterday.

The company, which has a market capitalization of 10.6 billion ringgit, had total debt of 4.2 billion ringgit at the end of June. The airport manager will report net income of 234.7 million ringgit this year, according to the average estimate of 19 analysts in Bloomberg survey, compared with 388.9 million ringgit in 2013. The company’s shares have fallen 14 percent this year, worse than the 0.3 percent decline in the benchmark stock index.

Malaysia Airports last sold Shariah-compliant securities in September 2013. The 4.15 percent notes due 2018 and the 3.85 percent debt due 2016 last yielded 4.17 percent and 3.87 percent, respectively, data compiled by Bursa Malaysia show.

Price Discovery

Borrowing costs on AAA-rated corporate non-Islamic bonds due 2024 climbed 40 basis points, or 0.4 percentage point, to 4.86 percent this year, according to a central bank index. That’s the highest level since September 2011.

“Rated perpetual issuance is rare in Malaysia and therefore I expect some price discovery to take place,” Norlia Mat Yusof, chief investment officer at Kuala Lumpur-based Etiqa Insurance & Takaful, said in an e-mail interview yesterday. “The yield must be reasonably above AAA issuance to account for the liquidity premium and the rather cautious investor sentiment due to rising interest rates.”

Worldwide issuance of bonds that comply with Islam’s ban on interest has climbed 27 percent this year to $26.9 billion, according to data compiled by Bloomberg. Malaysian sales have increased 78 percent to 39.3 billion ringgit, although the amount of offers has slowed from 18.7 billion ringgit in the first quarter.

Corporate Pipeline

The country’s beleaguered national carrier, which has lost two planes this year, sold 1 billion ringgit of perpetual Shariah-compliant notes in June 2012 to yield 6.9 percent. Khazanah Nasional Bhd., Malaysia’s sovereign wealth fund, has offered to take the airline private and announce details of a plan to revive it at the end of this month.

SP Setia, a property developer, issued 609 million ringgit of the debt at 5.95 percent last December and Boustead sold 201 million ringgit in June. All of the securities are unrated and can’t be traded under Malaysia’s Securities Commission rules.

“Perpetuals are attractive to investors because they offer higher yields,” Elsie Tham, a senior fund manager at Kuala Lumpur-based Manulife Asset Management Sdn., who oversees more than $1 billion, said in an Aug. 15 phone interview. “The offering should attract interest because the pipeline of corporate bonds in Malaysia is a bit dry at the moment.”

New Benchmark

Aeon Credit Service (M) Bhd., the Malaysian unit of Japan’s second-biggest consumer-finance company, still hasn’t offered perpetual sukuk since Managing Director Yasuhiro Kasai said it would do so in a Dec. 10 interview.

It’s more cost efficient to issue perpetual bonds than traditional equity because the transaction is tax deductible, said RAM Rating’s Lim. Corporates can improve their capital structure by replacing debt with notes that don’t mature because they are treated as shares by rating companies, he said.

“Malaysia Airports’ perpetual sukuk, once sold, will provide a benchmark to potential issuers,” Lim said. “Investors looking for higher yields will also have more investment choices.”

To contact the reporter on this story: Elffie Chew in Kuala Lumpur at echew16@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; James Regan at jregan19@bloomberg.net Andrew Janes

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