Malaysia Plans $9.9 Billion Sukuk to Finance Mass Railway

Malaysia plans to raise as much as 30 billion ringgit ($9.9 billion) through an Islamic bond program to fund construction of a mass railway in the Southeast Asian nation’s capital, the project’s manager said.

Dana Infra Sdn., a finance ministry company created to fund infrastructure development, will sell ringgit-denominated Islamic notes, or sukuk, with maturities of as much as 65 years, Azhar Abdul Hamid, chief executive officer of Mass Rapid Transit Corp., said in an interview late yesterday. It will initially take a bridging loan of 500 million ringgit from a consortium of banks to cover early building work, he said.

The sale of the bonds will help satisfy demand among insurers and banks for longer-maturity debt after companies in Malaysia issued a record 75.6 billion ringgit of sukuk last year, with 88 percent due in less than 10 years, according to data compiled by Bloomberg. Other local firms may also need to raise funds as part of a government-backed $444 billion plan to build railways, roads and power plants over the next decade.

“The Dana Infra program will allow investors, especially insurers, to extend their asset duration,” Michael Chang, who oversees $1 billion as head of fixed income at MCIS Zurich Insurance Bhd. in Kuala Lumpur, said in an interview today. “Demand for such bonds will be healthy because long-dated Islamic paper are rare.”

Sovereign Backing

Dana Infra “will sell 20 billion ringgit to 30 billion ringgit of sukuk in three to four months,” Azhar said. “Getting funding isn’t a problem as we have government support.” The bonds will likely receive a AAA rating from local rating companies due to sovereign backing, he said. Irwan Siregar, deputy secretary to the treasury, wasn’t immediately available to comment by telephone yesterday.

Malaysia’s government plans to sell 15-year Islamic bonds for the first time this year, which will also help set a benchmark for companies seeking financing. The planned sale by Dana Infra follows the 30.6 billion ringgit record issue of Shariah-compliant notes by the nation’s toll-road operator PLUS Bhd. completed in January.

PLUS issued the debt with maturities ranging from five to 27 years. The 4.31 percent notes due in January 2021 yielded 3.88 percent yesterday, compared with 3.96 percent on Jan. 17, according to Bursa Malaysia. The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index, which tracks the most-traded ringgit-denominated debt, rose 1.5 percent this year to an all-time high of 107.226 yesterday.

Awarding Contracts

Companies in Malaysia, the world’s biggest market for sukuk that pay returns on assets to comply with Islam’s ban on interest, have sold 2.9 billion ringgit of the debt this year, according to data compiled by Bloomberg. Global sales total $6.6 billion, compared with $3 billion in the same period of 2011.

State-owned MRT Corp. is managing the 156-kilometer (97-mile) Kuala Lumpur railway that may cost 48 billion ringgit including rolling stock, according to a government estimate in 2010. An updated costing will likely be made at year-end once key contracts have been awarded, Azhar told reporters last week when granting the project’s first major construction contracts worth a total 1.74 billion ringgit to IJM Corp. and Ahmad Zaki Resources Bhd.

The railway will ease traffic congestion in the capital and carry 2 million passengers a day when finished, with the first line scheduled for completion in 2016, the government said in its 2010 report.