By Bhupinder Singh
The sukuk, or Islamic bond market, looks set to make a strong comeback in the second half of the year as confidence returns to capital markets. In just the space of one week the sukuk pipeline has been strengthened by RM26 billion worth of firm and indicative proposals from local private and government owned — companies hoping to raise capital in 2009 and 2010.
The biggest of the proposal is the RM20 billion sukuk issuance programme by government — owned, Pengurusan Aset Air Bhd (PAAB). PAAB plans to use the money, to be raised progressively, to fund its water asset acquisitions, refinance debt and for the development of water assets in various states.
PAAB is expected to tap the market for RM2 billion as early as this month with its sukuk carrying an AAA rating issued by RAM Rating Services Bhd.
Analysts believe the conducive capital market environment that is awash with ample liquidity and improving sentiment among investors and corporates about a sustainable economic recovery is fuelling the strong recovery in the sukuk market.
"The funding needs are driven by real economic needs and come at a time when credit concerns are easing and interest rates are expected to be held at current levels. The market however only has the appetite for highly rated companies —AA and above," chief executive officer of Malaysian Rating Corp Bhd (MARC) Mohd Razlan Mohammed said.
"We hope that with the establishment of Danajamin Nasional Bhd, other lower rated companies will have access to the capital market," he added.
While the underlying business situation may be driving companies to issue debt, the historically low cost of capital could may turn out to be the once in a lifetime opportunity that cannot be ignored, thus feeding the sukuk pipeline as companies try to lock-in cheap funding rates.
"The low interest rate or cost of capital environment and the improving economic situation domestically and abroad could lead to companies rushing in to lock-in current low rates as they stand to see large cost savings," chief economist at RAM Dr Yeah Kim Leng said.
"The governments here and abroad have provided a supportive monetary environment since the financial crisis, and while there is still ample liquidity in the market, the lag effect of the expansionary fiscal and monetary stimulus will start to kick-in in six to nine months, after which we could be see policymakers undertake preemptive measures to quell excessiveve demand pressures. So we could start to see the withdrawal of the monetary stimulus by mid-2010," he said.
While countries like Australia have already moved to raise the cost of capital, Yeah believes the Malaysian government will want to ensure domestic demand and growth is strong enough to sustain itself before it moves to withdraw some of the monetary and fiscal measures in place.
The low cost of capital environment has already started to attract companies to market. For the first nine months of the year, new rated bonds assigned and announced totalled RM32.15 billion and about 70% of these were Islamic papers, according to MARC.
With new proposals coming out every other day, the debt market looks set to do much better than last year when a total of RM50.1 billion was raised by government and companies from the bond market in as compared to RM43.8 billion in 2007 (figure does not include Cagamas Bhd bonds) according to Bank Negara Malaysia's annual report.
The Islamic capital market abroad looks set to bloom as well. Total global sukuk issuances at the end of September stood at US$13.5 billion (RM45.77 billion) as compared to US$15.2 billion primary issues in 2008 according to data from Zawya.com.
In the third quarter alone, sukuk issuance worldwide rose to US$6.2 billion, or 82% higher, then in the corresponding quarter. Billions more will be raised in the months to come, among which will be the US$10 billion issuance by Dubai and US$1.5 billion by Indonesia.
The robustness of the Islamic financial industry during the global financial crisis is set to attract more corporates and investors. The International Finance Corp, a World Bank unit that lends to businesses, will raise US$100 million this month while companies like Sime Darby Bhd, Pelabuhan Tanjung Pelepas Sdn Bhd (PTP) and Khazanah Nasional Bhd from Malaysia, to Sinpas Gayrimenkul Yatirim Ortakligi AS of Turkey, plan to raise billions more. However, lenders and investors are still seeking safety in quality issuers.
Most of the sukuk proposals in Malaysia will have some form of government guarantee or are government-owned companies. The market has seemed to have set the floor at AA ratings but nothing has been cast in stone. Some investors may be prepared to seek greater risks to gain higher yields. "The best way to confirm this is for the lower rated papers be made available for potential investors.
It is all in the price. If it is acceptable to both parties (buyer and seller), a market can be made.
"Unfortunately, at the moment, only highly rated papers go to market. The hypothesis whether or not there is a market for lower rated papers is pure conjecture. It has yet to be tested by the market," CEO of Bond Pricing Agency Malaysia Sdn Bhd Meor Amri Meor Ayub said.
Mohd Razlan and Yeah are hoping bond guarantee issuer Danajamin, set up this year by the government to provide credit enhancement and market access, will help bridge the expectation gap of supplier of funds and sukuk issuers.
(This story appeared in The Malaysian Reserve on Oct 12, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)
