Wednesday May 30, 2012
Poor Q1 result prompts investors to demand at least 6% for MAS' RM1bil sukuk
KUALA LUMPUR: Malaysia Airlines' (MAS) fifth straight quarterly loss is prompting investors to demand a yield of at least 6% for a planned Islamic bond, 2 percentage points more than the average rate on global sukuk.
The national carrier said it will sell RM1bil of securities in June without a set maturity. It would be the first sukuk sold as perpetual bonds in the nation. Malayan Banking Bhd, the country's largest lender, paid 6% for similar notes that don't comply with Islamic tenets at the height of the 2008 credit crisis.
MAS is raising funds to expand its fleet and win back business from budget carrier AirAsia Bhd. The International Air Transport Association, which represents 240 airlines worldwide, has cut its 2012 profit forecast for the industry twice in six months because of higher oil prices and Europe's escalating debt woes.
“I would only look at MAS' bond above 6% given the turbulence in the aviation industry,” Chan Cheh Shin, who manages RM850mil as head of sukuk at OSK-UOB Islamic Fund Management Bhd in Kuala Lumpur, said in a May 25 interview. “The company's financials aren't great. A perpetual bond also has all the downsides of common shares such as huge volatility and default risk.”
Yields on global sukuk, which pay returns on assets to comply with Islam's ban on interest, dropped 22 basis points, or 0.22 percentage point, this year to 3.77%, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference between average yields and the London interbank offered rate, or Libor, narrowed 12 basis points to 261.
The airline's debt offering is part of a RM2.5bil programme and the initial RM1bil sukuk will pay a “prevailing-market profit rate,” according to an e-mailed statement on May 22. The funds raised would be used for working capital and to refinance existing loans, it said. The carrier has RM1.3bil of loans outstanding and no bonds, according to data compiled by Bloomberg.
“We opted to go for a perpetual sukuk because it would be treated as equity on our balance sheet,” Mohammed Rashdan Mohd Yusof, the company's deputy chief executive officer, said in a May 25 interview in Kuala Lumpur. Even so he said, the company has the option to repay the sukuk after 10 years “because that will give us a comfortable period to accumulate sufficient cash for full redemption.”
MAS would find it challenging to sell bonds because it doesn't have a credit rating, Sergey Dergachev, who helps manage US$8.5bil of emerging-market assets at Frankfurt-based Union Investment Privatfonds, said in a May 25 e-mail. Dergachev said he won't buy the sukuk and doubted whether it would “generate massive demand.”
“The structure worries me,” Dergachev said. “A perpetual with calling dates, from a non-rated issuer, is a new product and structure. It's a risky one in such a difficult environment.”
Global sales of syariah-compliant notes have more than doubled this year to US$16.6bil and reached a record of US$36.3bil in 2011, according to data compiled by Bloomberg. The bonds returned 3.4%, according to the HSBC/Nasdaq index, while debt in developing markets rose 3.9%, JPMorgan Chase & Co's EMBI Global Composite Index shows.
The yield on Malaysia's 3.928% dollar-denominated Islamic notes due in April 2015 held at 1.99% yesterday and climbed 13 basis points this month, according to data compiled by Bloomberg. The difference in yields between Malaysia's sukuk and the Dubai Department of Finance's debt narrowed one basis point to 209 and is down from 212 at the end of April.