Asia Islamic Bonds Find New Life in '16 After Worst Year in Five

  • Malaysia's Khazanah, Indonesia start process for dollar issues
  • Conditions still good for high-quality names: Union Investment

Asian issuers are leading a promising start to the year for global Islamic bonds after the poorest annual showing since 2010.

Malaysia’s sovereign wealth fund Khazanah Nasional Bhd. started investor meetings in the Middle East, Asia and Europe on Jan. 17. Indonesia’s government is due to pick banks for an offering by the end of January, the sixth consecutive year it’s issued international sukuk. Kazakhstan and Bangladesh are also both considering sales.

The two entities will have to navigate emerging-market turmoil triggered by a sliding Chinese yuan and tumbling commodities. Indonesia is on high alert after last week’s terrorist attacks in Jakarta, while Malaysia needs to repair confidence after its credit outlook was cut by Moody’s Investors Service. Conditions are good for quality names as dollar funding still isn’t expensive, according to Union Investment Privatfonds GmbH.

“Market volatility is huge so far this year and market timing will be key for success,” said Sergey Dergachev, a senior money manager who helps oversee $13 billion at Union Investment in Frankfurt. “A premium has to be offered.” He holds some Khazanah dollar bonds and said he would look at the new issue given its rarity.

Oil Impact

Sales of global Shariah-compliant securities fell 30 percent to $34.9 billion last year and there’s so far been no new offerings in 2016, data compiled by Bloomberg show.

Khazanah, which is rated the fourth-lowest investment grade of A3 by Moody’s and the same level as the sovereign, last sold foreign-currency Islamic debt in 2014. It issued $500 million of seven-year sukuk convertible into equities of state power company Tenaga Nasional Bhd.

Moody’s cut Malaysia’s credit-rating outlook to stable from positive earlier in January, citing an external environment that has crimped government revenue. Asia’s only major net oil exporter has been hit by a 41 percent tumble in Brent crude over the past 12 months and stands to lose 300 million ringgit ($68 million) for every $1 drop in the price of the commodity, according to government estimates.

Indonesia, which is rated three levels lower than Malaysia, plans to issue as much as $2 billion of global sukuk in 2016, Robert Pakpahan, director general for budget financing and risk management at the Finance Ministry, was citing as saying by the local daily Kontan in October. It sold $2 billion of 10-year dollar Islamic notes in May at a coupon of 4.325 percent and drew $6.8 billion in orders. The securities were paying 5.02 percent on Tuesday, compared with 4.96 percent at the end of 2015, data compiled by Bloomberg show.

‘Cautious Sentiment’

The Jakarta bombing on Jan. 14 that killed seven people including five terrorists has clouded the outlook for Asia’s most regular issuer of Shariah-compliant sovereign bonds just as the economy is forecast to have expanded last year at the slowest pace since 2009.

Khazanah may have to pay a premium of 150 basis points over U.S. Treasuries and Indonesia as much as 270 basis points, assuming they issue five-year paper, said Winson Phoon, a Kuala Lumpur-based fixed-income analyst at Maybank Investment Bank Bhd. Those notes were last paying 1.46 percent.

“Weighing against the risk of potentially higher dollar-funding conditions when the Federal Reserve tightens further, it could still be a good window of opportunity,” said Phoon. “Overall demand for sukuk remains healthy, although there may need to be some yield premium with a confluence of uncertainty and cautious sentiment.”

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