Malaysia’s Sarawak Hidro Plans $1.3 Billion Islamic Bond Sale

  • Government-owned company aims to sell AAA-rated sukuk in July
  • Proceeds from offering to refinance state-guaranteed debt

Sarawak Hidro Sdn., the state-owned developer of Malaysia’s biggest hydropower project, plans to offer 5.5 billion ringgit ($1.3 billion) of sukuk without a government guarantee as it seeks to ease the nation’s fiscal burden.

Sarawak Hidro, owned by Malaysia’s Ministry of Finance, will use the proceeds to repay existing debt that has a state guarantee, Managing Director Zulkifle Osman said Monday in an e-mailed response to Bloomberg queries. The company aims to sell the Islamic bonds in July, the statement shows. The planned sukuk offering has a preliminary AAA rating from local assessor RAM Rating Services Bhd., according to Zulkifle.

The electricity generator is weaning off government guarantees for its latest sukuk program as a way to reduce the nation’s debt burden, even as sales of such securities climbed to a record this year. Sarawak Hidro’s power plant on Borneo island is part of Prime Minister Najib Razak’s $444 billion development plan, which includes improving infrastructure as the country seeks to become a developed economy by 2020.

“The move is positive for the government to manage the risk of contingent liabilities, by leaving companies with healthy cashflows to have their standalone rating,” Fakrizzaki Ghazali, a Kuala Lumpur-based strategist at RHB Research Institute Sdn., said by e-mail Monday. The limited supply of local AAA-rated debt this year could support demand for the offering, according to Ghazali.

Debt Target

Malaysia aims to cut its ratio of debt to gross domestic product to 45 percent by 2020, from 54.5 percent at the end of last year, the finance ministry said in an e-mailed response to Bloomberg queries last week. Sales of government-guaranteed sukuk in Malaysia, the world’s biggest Shariah-compliant debt market, rose to a record 12.1 billion ringgit so far this year, data compiled by Bloomberg show.

Sarawak Hidro appointed Malayan Banking Bhd. and RHB Investment Bank as joint lead managers for the offering, according to Monday’s statement. The company last sold government-guaranteed Islamic bonds in 2013, when it priced 500 million ringgit of 2028 sukuk with a coupon rate of 4.58 percent, data compiled by Bloomberg show. The yield on the securities dropped 61 basis points this year to 4.63 percent, according to the data.

The planned offering would be used to refinance a government-backed loan from Malaysia’s Employees Provident Fund used to complete the Borneo power plant, Zulkifle said in the statement Monday.

Malaysia’s federal government debt amounted to 630.5 billion ringgit at the end of 2015, according to data published on the central bank’s website. The outstanding debt guaranteed by the state totaled 177.7 billion ringgit, or 15.4 percent of GDP.

Sales of local-currency securities that comply with religious tenets have climbed to 28.7 billion ringgit this year, up 18 percent compared with the same period in 2015, data compiled by Bloomberg show.

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