Malaysia’s Senai-Desaru to Restructure Islamic Bonds

Malaysia’s Senai-Desaru Expressway Bhd plans to restructure RM1.46 billion (US$457 million) of Shariah-compliant bonds to avoid becoming the country’s biggest Islamic-debt defaulter in more than two years. The toll-road operator may seek to reschedule repayments or refinance, Chief Executive Officer Mustaza Salim said in an interview yesterday in Kuala Lumpur, reports Bloomberg (April 16, 2010).

RAM Holdings Bhd., one of two credit-rating agencies in Malaysia, cut the company’s long- term rating last week to C1 from AA3, citing a “high likelihood of default” when its first principal payment falls due in December 2011. The company is seeking to avoid the country’s biggest sukuk failure since a 2 billion ringgit default by Sistem Lingkaran Lebuhraya Kajang Sdn Bhd in August 2007, the rating company’s data shows. RAM’s report said traffic on the highway, which opened in Malaysia’s southern state of Johor in October 2009, is less than 10 percent of what was projected, it adfded.

"Their traffic volumes are low due to delays in the completion of the highway,” which undermines the company’s ability to generate cash, Yean Ni Ven, a RAM analyst based in Kuala Lumpur told the newswire.

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Senai-Desaru’s June 2015 and December 2020 bonds haven’t traded since 2007, according to Ambank Bhd. in Kuala Lumpur, which said the notes would yield 39 percent and 44 percent, respectively. When last traded in 2007, they yielded 5.91 percent and 6.9 percent, Ambank said.
Senai-Desaru sold the sukuk maturing in six to 15 years in 2005 to help fund a 77-kilometer toll highway, the third-longest in the country after the 848-kilometer North-South Highway and the 169-kilometer East Coast link.
The company will present an initial restructuring proposal to bondholders this month with a final plan to be ready by the end of May, CEO Mustaza said. “At the moment, it’s still too early to talk about details,” he said.
Traffic volume on the expressway has “improved,” Mustaza said, without elaborating. Senai-Desaru is a privately run company 70 percent owned by Rancak Bistari Sdn., with the rest held by YPJ Holdings Bhd.
Shariah-compliant bonds follow Islamic principles, which forbid the payment of interest and stipulate agreements be based on the transfer of goods or services. In Senai-Desaru’s case, the contract is backed by revenue from the toll roads.
Bond Defaults
Islamic bond defaults in Malaysia reached 176 million ringgit in the first four months of this year, 65 percent of the total in 2009 when the country suffered its first recession in a decade. Malaysian Merchant Marine Bhd. and Evermaster Group Bhd. were among the domestic companies that defaulted on Islamic debt this year, stock exchange filings showed.
This won’t deter interest in Shariah-compliant finance, said Badlisyah Abdul Ghani, head of Islamic-banking operations at CIMB Group Holdings Bhd., last year’s top global underwriter for Islamic bonds or sukuks. Global Islamic bond sales may climb 24 percent this year from $20.2 billion in 2009 as the global economy recovers, Kuala Lumpur-based Badlisyah said.
The world’s biggest sukuk defaulter in the past year is Saad Trading, Contracting & Financial Services Co., owned by Saudi billionaire Maan al-Sanea and his family, which missed payments on its $650 million Islamic bonds in November.
“Islamic debt default is a credit issue,” said Zakariya Othman, head of Islamic finance at RAM in Kuala Lumpur. “It’s got nothing to do with the structure. You can’t say, for example, when someone defaults on his mortgage that it’s because of the structure of the loan.”
The toll-road operator issued the bonds in December 2005, which have maturities ranging from six years to 18.5 years, with an annual profit-sharing rate of 3.5 percent.
Kuala Lumpur-listed builder Ranhill Bhd. holds convertible bonds in the toll-road operator that could be exchanged into shares equivalent to a 50 percent stake, according to Senai- Desaru’s bond prospectus. Ranhill’s Chief Financial Officer Amran Awaluddin wasn’t immediately available to comment.
Senai-Desaru holds the concession to operate the 77- kilometer highway for 33 years. It is the third-longest highway project awarded by the Malaysian government, according to the company’s Web site.