Malaysian Road Sukuk Shunned by Investors on Debt Revamps

(Bloomberg) - Hong Leong Islamic Bank Bhd. and Manulife Asset Management (Malaysia) Sdn. say they are avoiding some toll-road Islamic debt in Malaysia as two highway operators submitted debt restructuring plans this year.

Senai-Desaru Expressways Bhd., the builder of Malaysia’s third-longest highway, plans to conclude talks on reorganizing 1.46 billion ringgit ($471 million) of debt by year end, Chief Executive Officer Mustaza Salim said in an interview in Kuala Lumpur today. Konsortium Lebuhraya Utara-Timur (KL) Sdn., which operates a highway near the capital, is close to an agreement with creditors to replace 780 million ringgit of sukuk maturing between 2010 and 2018 with new debt, according to a Sept. 3 report from Malaysian Rating Corp.

Traffic on some roads isn’t sufficient to generate enough revenue, said Jamil Baharuddin, the head of bond trading at Kuala Lumpur-based Hong Leong Islamic, a unit of Malaysia’s sixth-largest lender. Estimates for cash flows on routes in less-developed areas were too optimistic, according to Manulife Asset, a unit of Canada’s biggest insurer.

“Investors we have been talking to are shying away,” Jamil said in an interview from Kuala Lumpur yesterday. “We are more cautious toward toll-road operators depending on exactly which highways because some are not getting enough volumes.”

Sukuk sales in Malaysia dropped 30 percent this year as companies cut infrastructure spending following a recession in 2009. Issuance in the world’s biggest market for Islamic debt slumped to 18.2 billion ringgit ($5.9 billion) so far this year, according to data compiled by Bloomberg.

Infrequent Trades

Sukuk due December 2011 sold by Senai-Desaru, which announced its restructuring in April, yielded 5.68 percent when they were last traded in May 2008, according to prices from CIMB Group Holdings Bhd. The debt was priced to yield 3.5 percent when it was issued in 2005.

The yield on the 6.95 percent Shariah-compliant notes due October 2012 sold by Konsortium was 6.42 percent on May 18, when they were last transacted, according to CIMB, which didn’t provide previous price data. There’s been no trade since the rating company’s report. The indicative yield on Malaysian five- year government Islamic bonds fell 24 basis points to 3.39 percent this quarter, an index by the central bank shows.

Sales Drop

Sales of sukuk, or debt that pays asset returns to comply with Shariah law’s ban on interest, fell 24 percent to $10.7 billion so far this year, data compiled by Bloomberg show.

The spread between the average yield for Islamic bonds and the London interbank offered rate widened five basis points to 381 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The yield difference has narrowed 86 basis points this year. A basis point is 0.01 percentage point.

Shariah-compliant bonds returned 10.9 percent this year, the HSBC/NASDAQ index showed, while debt in developing markets gained 13 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

The yield on Malaysia’s 3.928 percent sovereign Islamic note due June 2015 rose two basis points to 2.66 percent today, according to prices from the Royal Bank of Scotland Group Plc.

Delays in toll-road projects are common, Sandeep Bhattacharya, an analyst at Malaysian Rating, one of the nation’s two ratings companies, said in an interview yesterday from Kuala Lumpur.

‘Not Committed’

“If you’re not committed to investing long term, forget about investing in infrastructure,” Bhattacharya said. Toll- road companies “often miss their initial forecasts but often catch up in the long run,” he said.

Manulife Asset didn’t buy the bonds sold by Senai-Desaru and Konsortium, Ho Su Ann, who helps manage the equivalent of $900 million at Manulife in Malaysia, said in telephone interview in Kuala Lumpur yesterday.

“When we did our own assessment we thought that there were better opportunities” elsewhere, said Ho, adding that some toll-road debt is worth buying.

PLUS Expressways Bhd., Malaysia’s state-controlled highway operator, is “a very good example of a toll road that would generate enough cash flow,” she said. The yield on PLUS’s 2 percent sukuk maturing in March 2015 fell 55 basis points to 4.35 percent this year, according to prices from Bursa Malaysia Bhd. The notes returned 6.3 percent, the data show.

RAM Rating Services Bhd., the biggest of the nation’s credit rating firms, cut Senai-Desaru’s rating to C1, or junk grade, from AA3, in April, citing a “high likelihood of default” when its first principal payment falls due in December 2011. In June, RAM raised the rating to BBB3, its lowest investment grade, citing progress in debt restructuring.

Malaysian Rating revised its outlook on Konsortium to ‘stable’ from ‘developing’ on Sept. 3, saying the company will probably conclude its debt refinancing plan by mid-October. Officials at Konsortium didn’t respond to an e-mail and telephone calls seeking comment in Kuala Lumpur today.

“Any new issuance would be under the microscope,” Zakariya Othman, head of Islamic finance at RAM, said in an interview in Kuala Lumpur on Sept. 22. “Investors can demand higher yields.”