Sukuk Record Scuppered As 1MDB Delays 2014 Sale: Islamic Finance

Global Islamic bond sales look set to miss out on a record year after Malaysia’s sovereign wealth fund postponed what would have been 2014’s biggest offering. The top underwriter is also cautious over the coming year.

Issuance to date is $2.1 billion shy of the unprecedented $46.8 billion in 2012 and more than last year’s $43.1 billion total, data compiled by Bloomberg show. 1Malaysia Development Bhd., which has come under criticism from opposition lawmakers because of its rising debt, put off a plan yesterday to sell the equivalent of $2.4 billion of sukuk until the first half of 2015, said two people with knowledge of the deal.

CIMB Group Holdings Bhd. (CIMB), this year’s leading Islamic debt arranger, predicts that it will be a challenge for sales to test new highs next year as the slump in crude oil prices may deter issuance. Much will depend on first-time entrants coming to the market after debut offerings from the U.K., Luxembourg and Hong Kong in 2014, according to AmInvestment Bank Bhd.

Quarter Slump

Global issuance of sukuk is set for the worst quarter since the three months ended June 2013, with sales so far of $7.8 billion. In the six-member Gulf Cooperation Council, which relies on oil revenues, offerings climbed to $2.4 billion from last quarter’s $750 million, even as Brent crude tumbled 43 percent from its June high.

CIMB’s Badlisyah said it may take another six months for oil prices to stabilize and issuers in the Middle East may have to sell Islamic debt to raise funds. Malaysia, which is also a net exporter of the fuel, may see support for sukuk as the government undertakes projects linked to its $444 billion development program, he said.

1Malaysia Development is postponing the sukuk as it seeks a six-month extension from the nation’s energy commission to build a coal-fired plant south of the capital, said one of the people familiar with the matter. The state-owned firm, which has been criticized by three opposition lawmakers over its debt, had planned to sell notes due in five to 23 years in November. A company official declined to comment when contacted by phone yesterday.

Bond issuance will likely taper off now as bankers and investors go on their year-end holidays, said Badlisyah.

Rate Outlook

Borrowers will face the prospect of higher interest rates in 2015 as the Federal Reserve starts raising its benchmark rate for the first time since 2006. The median estimate in a Bloomberg survey is for Malaysia’s central bank to keep its rate at 3.25 percent at least until the final quarter next year.

“While issuance is subject to prevailing market conditions, the sukuk market next year is expected to continue on a similar trajectory path as 2014,” Leon Koay, managing director and country head of financial markets at Standard Chartered Bank Malaysia Bhd., part of the fourth-largest Islamic debt arranger, said in a Dec. 5 e-mail. “There may be issuers who will opportunistically tap the sukuk and bond markets.”

Malaysia Dominates

HSBC Holdings Plc is the second-biggest arranger of Shariah-compliant notes this year behind CIMB. Malini Saudranrajan, media relations manager at HSBC Bank Malaysia Bhd., wasn’t immediately able to give comment on the 2015 outlook in response to a Dec. 2 e-mail.

In Malaysia, the world’s biggest sukuk market, offerings may surpass this year’s level in 2015, supported by Prime Minister Najib Razak’s infrastructure spending, according to AmInvestment Bank.

Sales in the Southeast nation have climbed 48 percent in 2014 to 55.2 billion ringgit from a year earlier, data compiled by Bloomberg show. Islamic bond offerings from the GCC, which includes the United Arab Emirates, Saudi Arabia and Bahrain, fell 28 percent to $14.8 billion.

“The uncertainty over the oil price and interest rates are factors that could affect sukuk sales next year,” Mohd. Effendi Abdullah, head of Islamic markets at AmInvestment, said in a phone interview yesterday. “Most of the issuance will still come from Malaysia and some from the Middle East.”

Originally published on www.businessweek.com