MAS issues RM2.5b perpetual sukuk, risky financing for working capital

KUALA LUMPUR, June 12 — Loss-making Malaysia Airlines (MAS) will be the first company in Malaysia to establish an Islamic perpetual bond today totalling RM2.5 billion for its operations even as concern rises in the region over the growing demand of the higher risk bonds.

This comes after reports that the Monetary Authority of Singapore is increasingly concerned over the unprecedented demand for perpetual bonds, also known as perps, which typically entice investors with higher coupon rates in exchange for accepting a higher level of risk as there is a possibility their capital may not be repaid, hence the term perpetual.

MAS posted a RM2.52 billion loss for 2011. — Picture coutesy of www.airliners.net

The Thai SEC (Securities and Exchange Commission) also issued a warning earlier this month for investors to fully understand the details of subordinated debentures, which is corporate debt that ranks as a low priority for repayment.

MAS said that the perpetual junior sukuk will be recognised not as debt but as equity and payment obligations will at all times be junior to the claims of present and future creditors of the flag carrier but ahead of other share capital instruments. The national airline has RM1.3 billion of loans outstanding and no bonds, according to data compiled by Bloomberg.

The tenure of the sukuk is perpetual and MAS has a call option to redeem the junior sukuk at the end of the 10th year and on each following periodic distribution date.

MAS can also redeem the junior sukuk if there is a change in accounting standards resulting in it no longer being recognised as equity.

The airline may also defer periodic distributions but the deferred distributions will be cumulative.

The sukuk will also not be rated.

Opus Asset Management chief investment officer Siaw Wei Tang said it was important for prospective investors to read and understand the terms and conditions of perpetual bonds.

He noted that some perpetual bonds in the past had the option of not paying periodic distributions if the company did not issue dividends.

Chris Eng, head of research of the investment management division at Etiqa Insurance and Takaful, said that what was important about the MAS perpetual sukuk was whether it has a government guarantee.

He added that perpetual bonds could be more interesting for insurance companies given their long dated liabilities.

“I would only look at Malaysia Airlines’ bond above 6 percent given the turbulence in the aviation industry,” Chan Cheh Shin, who manages RM850 million as head of sukuk at OSK-UOB Islamic Fund Management Bhd in Kuala Lumpur, said in a May 25 interview with Bloomberg. “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 percent, 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.

Reuters reported that more perpetual bonds were sold in Singapore in the first three months of 2012 than in the previous 15 years.

The newswire said that perpetual bonds offered companies the “tantalising” opportunity to raise funds with no dated maturity and avoiding any impact on gearing ratios.

The bonds also offer higher coupons, attractive for investors in a low interest-rate environment, but come with high duration risk since there is no repayment guarantee.

The perpetual junior sukuk of up to RM2.5 billion is part of MAS’s RM9 billion fund raising plan and the proceeds are expected to be used for its working capital needs and refinancing of existing borrowings. 

The airline posted a RM2.52 billion loss for 2011.