May 19 (Bloomberg) -- Malaysia’s planned global Islamic dollar bond, its first sovereign debt offering in almost eight years, was assigned preliminary investment grade ratings of A- by Standard & Poor’s and A3 from Moody’s Investors Service.
The Southeast Asian nation is tapping the international debt market for the first time since 2002 as the government aims to increase development spending to boost economic growth. Sales of notes that comply with the religion’s ban on interest rose 24 percent so far in 2010, the most in three years, as the European financial crisis bolstered demand for alternative investments in emerging markets.
Malaysia had a budget deficit of 7 percent of gross domestic product last year, compared with 13.6 percent for debt- stricken Greece, 11.2 percent for Spain and 9.4 percent for Portugal. For an emerging market, Malaysia has a “a strong credit standing,” according to Exotix Holdings Ltd. in London.
“There will be demand because Malaysia’s back in the market for the first time in a long time,” Stuart Culverhouse, chief economist at Exotix Holdings, said in an interview yesterday. “It is seen as a country that’s followed sound economic policies, economic orthodoxy with strong institutions and with an established track record of paying its debt.”
‘Strong External Position’
The country starts marketing the sukuk notes from today to investors in Asia, Europe, the U.S. and Middle East, with Barclays Capital, HSBC Holdings Plc and Malaysia’s CIMB Group Holdings Bhd. lead arrangers, a banker with knowledge of the matter said yesterday, declining to be identified. Malaysia is the world’s biggest market for Islamic bonds, which are backed by physical assets and pay profit rates instead of interest, which is prohibited by Shariah law.
The rating “reflects the strength of the transaction documentation, including the lease and purchase undertaking agreements,” S&P said in a statement released late yesterday.
“Malaysia’s sovereign creditworthiness has been underpinned through the global crisis by its strong external position, deep and liquid domestic capital markets, and a strong and well managed financial system,” Aninda Mitra, a vice- president and Moody’s lead sovereign analyst for Malaysia, said in a report today.
‘Better Reception’
The $195 billion economy is forecast by the central bank to expand as much as 5.5 percent this year after emerging from its first recession in a decade in the fourth quarter. Prime Minister Najib Razak plans to unveil a new five-year development plan in June.
Yields on bonds in Greece, Portugal and Spain have surged as the countries struggle to rein in budget deficits, which are the largest in the European Union, and finance debt obligations. Greece will tap emergency loans from the euro region today to repay 8.5 billion euros ($10.5 billion) of 10-year bonds.
“When there’s a drop in confidence in the traditional bond market, when there is concern with the traditional bond or traditional credits like in Europe, people look for diversification and therefore bonds from the Far East and Islamic bonds can get a better reception in this environment,” said Nazir Razak, chief executive officer of CIMB Group Holdings, Malaysia’s top underwriter of sukuk notes last year.
Pricing Benchmark
The latest sovereign issue will provide a new benchmark for pricing bonds in Malaysia as the only other outstanding global note matures next year. The 7.5 percent security maturing in July 2011 yielded 1.21 percent yesterday, 59 basis points less than at the end of last year, according to data compiled by Bloomberg.
“Just because it’s a sovereign debt doesn’t mean that it’s risk free,” Ali Khan, head of cash-equity trading at Dubai- based Arqaam Capital Ltd., said in a telephone interview yesterday. “Even sovereign debt right now will have to pay more in the debt market because of the prevailing scenes surrounding sovereign debt in Europe and the United Arab Emirates.”
--With assistance from Dana El Baltaji in Dubai. Editor: Simon Harvey, Barry Porter
To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
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Malaysia has an “a strong credit standing,” according to Exotix Holdings Ltd. in London. This is great.
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