Euro Debt Gains Favor as Telekom Malaysia Sells: Islamic Finance

Malaysia’s national telecommunications company may choose the euro for its debut global Islamic bond sale, which would be only the fourth sukuk issuer to select the European currency.

Telekom Malaysia Bhd. is seeking to raise $750 million as part of a debt program to fund capital requirements, and will pick either the dollar or the euro depending on which gives “better pricing,” Chief Financial Officer Bazlan Osman said in an interview Monday in Kuala Lumpur. Offerings of ringgit-denominated Islamic bonds are having the worst start to a year since 2010 amid a plunging currency and oil prices, prompting investors to favor overseas notes.

Asian issuers, including Malaysia’s state oil company Petroliam Nasional Bhd. and Indonesia’s government, are tapping international investors to lock in lower funding costs before the U.S. increases interest rates for the first time since 2006. European Central Bank President Mario Draghi is embarking on an unprecedented plan to buy 60 billion euros ($65 billion) of assets a month, pumping the continent full of cash seeking higher returns.

“The planned sale of a euro-denominated sukuk would be positive for the industry as it would broaden the range of offerings,” Jesse Liew, Kuala Lumpur-based head of global Islamic bonds at BNP Paribas Investment Partners Malaysia, which has more than $900 million of assets, said by phone Monday. “Demand from investors outside the euro-zone may not be as strong compared to a U.S. dollar-denominated facility.”

Currency Losses

The euro has slumped 13 percent against the U.S. currency in three months, while a dollar gauge has climbed to the strongest since the index’s inception in 2004. The ringgit is Asia’s worst-performing currency, having fallen 13 percent in the past six months.

Luxembourg picked euros for its debut sukuk in 2014, while Hong Kong chose the greenback and the U.K. opted for a sterling issue for their first-time sales last year. Only the Islamic Development Bank in Jeddah, Saudi Arabia, and Al Farooj France SAS have sold the debt in the single currency.

The yield on Luxembourg’s 0.436 percent Shariah-compliant notes due 2019 fell three basis points, or 0.03 percentage point, Monday to 0.28 percent after rising to a one-month high of 0.31 percent Friday, data compiled by Bloomberg show. The sale was two times oversubscribed versus 10 times in the U.K.

Spread Risk

Telekom Malaysia, which is rated the fourth-lowest investment grade of A- by Standard & Poor’s, aims to finalize the documents for the multicurrency debt program by the end of the month, Baslan said.

“The program will give us the opportunity to tap the global market when borrowing costs are competitive or better than local rates,” Bazlan said. “It will enable us to spread out our project risks and to match our liabilities.”

Telekom Malaysia last sold dollar bonds in 1995. The yield on the 7.875 percent non-Islamic notes maturing in August 2025 dropped two basis points Tuesday after reaching a three-month high of 4.13 percent yesterday. It has an existing 3 billion ringgit ($811 million) local-currency Shariah-compliant bond program.

“The company will get investors’ interest as it has good ratings and is a utility that is backed by the government,” Mohd. Effendi Abdullah, head of Islamic markets at AmInvestment Bank Bhd., said by phone Monday. “The Islamic finance industry needs to have more high-quality sukuk to be more vibrant.”

‘Trail Blazing’

Worldwide offerings of bonds that pay returns on assets to comply with Islam’s ban on interest, including local-currency notes, dropped 64 percent so far this year to $3.1 billion. In Malaysia, sales slid 59 percent to 4 billion ringgit. As well as Indonesia and Petronas, Malaysia’s government is also planning a dollar sukuk this year, along with the Export Import Bank of Malaysia. PT Garuda Indonesia is also seeking to raise funds through a U.S. currency issue.

The average yield on global dollar sukuk has fallen 14 basis points to 2.91 percent so far in 2015, near a one-year low of 2.76 percent on Nov. 28, according to a Deutsche Bank AG index. Euro-area 10-year government bonds pay 0.31 percent

“If Telekom Malaysia is successful in selling euro-denominated sukuk, it will be trail blazing for other Malaysian issuers,” James Lau, an investment director at Kuala Lumpur-based Pheim Asset Management Asia Sdn., who oversees $300 million, said by phone Monday. “It will also add a little color to the global Islamic bond market.”

Before it's here, it's on the Bloomberg Terminal.