PETALING JAYA: The financial services sector will see new issuance of Islamic papers this year although the outlook for sukuk or the Islamic bond market is sluggish, said Malaysian Rating Corp Bhd (MARC) chief executive officer Mohd Razlan Mohamed.
He attributed this to the shoring up of capital by banks in anticipation of a deterioration in asset quality and a rise in non-performing loans.
Banks would need to issue subordinated debt that would qualify as Tier-2 capital to bolster their capital base, Razlan said.
Notable sukuk issues in the pipeline for which MARC is expected to make rating announcements in the coming weeks include CIMB Islamic Bank’s inaugural RM2bil junior sukuk programme and a highly-rated diversified local corporate’s RM800mil Islamic commercial papers/medium-term notes programme to fund operations.
MARC also had RM10bil worth of rated Islamic debt/sukuk in the pipeline waiting for the right timing for issuance, he said.
Apart from CIMB Islamic, Razlan also expects other major syariah-compliant lenders to issue sukuk.
Investors viewed this sector as less risky compared with manufacturing and even property development, he said.
Nevertheless, MARC sees “a subdued outlook for sukuk issuance owing to weaker demand and supply fundamentals.”
“Demand for new financing has reduced in the context of slowing economic activity while on the supply-side, increased risk aversion on the part of investors has made it increasingly difficult for lower-rated investment grade issuers to access the domestic bond market,” Razlan said during an interview.
“Our view is that issuance may only pick up once the economy starts to exhibit signs of meaningful recovery after the second half of this year.”
Issuance of sukuk in the first four months of this year stood at RM3.72bil, about 19.4% lower than the RM4.62bil in the corresponding period last year based on data from Bond Pricing Agency Malaysia.
RAM Rating Services Bhd CEO Liza Mohd Noor, who also sees a subdued outlook for the sukuk market, said the company currently had close to RM20bil worth of rated corporate sukuk in the pipeline, largely from the financial services and infrastructure sectors.
How much of that would actually be issued really depended on financial market conditions, she added.
The issuance of sukuk was expected to be driven by sovereign borrowings as governments sought funds to finance their fiscal stimulus packages to pump prime their respective economies, she said.
“Demand for government bonds is likely to remain intact as these are widely seen as safe-haven assets.
“We believe sovereign issuers will play a more important role in the sukuk market in 2009 and possibly 2010, with Malaysia leading the Asean pack,” she said.
Investors were much more risk averse now but what was alarming was that investors’ interest in top-rated AA2 and AA3 papers had waned considerably, Liza said.
“Our concern is that the double-A rated market will not recover even when the dust settles, and suffer the same fate as that of the single-A and triple-B rated markets, which have long disappeared,” she said.
“Credit spreads on sukuk have also generally followed the same trend as conventional bonds. Hence, while there is still a healthy pipeline of rated sukuk in RAM Ratings’ portfolio, there is currently a pricing gap between the rates that borrowers are willing to pay against what investors are willing to accept,’’ Liza noted.
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