A sukuk sale by a Malaysian state-owned power producer will shed some light on the cost of a political scandal involving Prime Minister Najib Razak.
Sarawak Energy Bhd is seeking to raise 1bn ringgit (257mn) by selling notes with maturities of 10 and 20 years this week, people familiar with the matter have said. The sale will be the first since the Malaysian Anti-Corruption Commission said on Monday that 2.6bn ringgit that ended up in Najib’s personal bank accounts were donations and not from a debt-ridden state investment company.
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Malaysia’s sovereign Islamic bond sale last week drew the weakest demand of 2015 after the Wall Street Journal reported funds linked to 1Malaysia Development Bhd had found their way into Najib’s accounts. Higher borrowing costs would make it more expensive to finance the government’s 444bn development plan to build rail, roads and ports as it seeks to become an advanced economy by 2020.
“There will be some slight apprehension to the offering” given the political climate, said Edward Iskandar Toh, chief investment officer for fixed income at Areca Capital Bhd, which oversees 500mn ringgit in Kuala Lumpur. “But demand will be there because it’s a good paper.”
Sarawak Energy, which is based on the island of Borneo and rated investment grade of AA1, is “primed to tap the market when conditions stabilise,” chief financial officer Alexander Chin said in a phone interview. The company is seeking to sell the 10-year sukuk to yield 4.65% to 4.75% and the 20-year note at 5.25% to 5.35%, people familiar said, adding that the order book closes on Friday.
The company has the option to raise the offering size and proceeds will partly finance the construction of a 3bn ringgit, 600 megawatt coal-fired power plant, Chin said.
Najib has faced calls to step down from former premier Mahathir Mohamad because of 1MDB, which accumulated 42bn ringgit of debt in less than five years. Najib, who is chairman of the fund’s advisory board, has denied taking money for personal gain. Mahathir said on his personal blog on August 3 that while it’s not illegal to accept donations into personal accounts, having 2.6bn ringgit is against election rules as there’s a limit on those expenses.
“We believe the recent allegations of graft involving 1MDB in Malaysia will not impede effective policymaking,” Standard & Poor’s said in a July 27 report that affirmed the nation’s A- rating. “We expect the government to stay the course on its fiscal and economic reforms.”
Sarawak Energy is reviving the sukuk offering from last month after the yield on Malaysian 10-year non-Islamic corporate bonds rated AA1 dropped 22 basis points to a 17-month low of 4.85%, according to a central bank index. The 15-year yield fell 21 to 5.21%.
Companies will want to take advantage of the lower yields as a US interest-rate increase nears, according to Pheim Asset Management Asia Bhd.
“Issuers will want to sell now because the window is getting narrower,” said James Lau, a Kuala Lumpur-based investment director at Pheim Asset overseeing 300mn. “While the current political situation may trigger a bit of nervousness among some investors, it’s a passing phase and has also made ringgit assets cheaper to foreign investors.”
Malaysia’s currency is Asia’s worst performing this year as the 1MDB probe added to pressure from falling oil prices and an imminent US rate increase. The cost to insure the nation’s bonds has climbed above that of Thailand and the Philippines.
Sukuk sales in Malaysia have fallen 34% to 27.2bn ringgit in 2015 from a year earlier, data compiled by Bloomberg show, while the nation’s Islamic banking assets are a record 625.2bn ringgit.
Demand for Sarawak Energy’s debt will be supported because it’s “fairly liquid and the primary private debt securities pipeline has been dry for the past few months,” said Khoo Poh Sim, a Kuala Lumpur-based portfolio manager at BNP Paribas Investment Partners, which has more than 1bn of assets.
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