Wed, 18 May 2011
From: The Jakarta Globe
By Suryani Omar

Investors in Malaysia and Indonesia say they favor sovereign sukuk over a planned dollar issue by the Islamic Development Bank after government securities returned almost twice as much as the multilateral lender’s this year.

IDB’s 1.775 percent Shariah-compliant debt due October 2015 gained 1.1 percent. Indonesia’s 8.8 percent US currency sukuk maturing April 2014 returned 1.6 percent, while Malaysia’s 3.928 percent June 2015 note climbed 3.1 percent, prices from Royal Bank of Scotland Group show.

The IDB bond’s yield of 2.1 percent compares with 2.96 percent for Indonesia and 2.4 percent for Malaysia.

MNC Asset Management in Jakarta and AmInvestment Management in Kuala Lumpur do not plan to bid at the IDB sale this month because sovereign debt offers less risk and higher yields. Rates on global sukuk are at a six-year low, prompting Sharjah Islamic Bank, Albaraka Banking Group and Qatar Islamic Bank to announce new sales, which climbed 20 percent this year.

“Since IDB is a very high-quality issuer, it will price at a pretty low yield,” Zeid Ayer, a fund manager at CIMB-Principal Islamic Asset Management, said May 11. “Investors who need to reach for yield probably won’t find this deal too attractive.”

The IDB will sell as much as $1 billion worth of sukuk this month, President Ahmad Mohamed Ali said on May 11. The lender, whose 56 member countries include Pakistan and Iran, is rated AAA by Standard & Poor’s and Aaa by Moody’s Investors Service.

Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds, said a yield of 2.5 percent to 2.6 percent on the IDB sukuk would be needed to attract him because of “uncertain market conditions.”

“The IDB has a strong credit, and there is a scarcity of strong, corporate issues for sukuk,” said Dergachev, who helps manage the equivalent of $9.6 billion of emerging-market debt.

“I expect that we will see more volatility in global markets ahead, including sovereign debt issues in Europe.”

Global sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, rose to $5.6 billion this year from $4.6 billion in the same period of 2010. Offerings from the Persian Gulf fell 58 percent to $964 million.

Malaysia and Indonesia’s dollar-denominated Islamic bonds offer yields that Islamic Development Bank’s sukuk is unlikely to beat, according to MNC Asset Management and AmInvestment Management.

Indonesia plans to issue its second Islamic US currency bond in the second half of this year, Rahmat Waluyanto, director general at the Finance Ministry, said on May 11.

The country is rated BB+ by S&P, one level below investment grade, while Malaysia, the world’s largest market for sukuk, is ranked A-, the fourth-lowest investment grade.

“I’d rather wait for the Indonesian sale,” Akbar Syarief, a fund manager at MNC Asset Management, said on May 11. “The IDB sale will definitely not be able to offer higher yields compared to Indonesia because of the higher rating.”

Investors will also look for a yield premium from IDB on speculation the Federal Reserve will increase interest rates after leaving borrowing costs at between zero and 0.25 percent since 2008, Mohd Farid Kamarudin, executive director of sukuk and alternative investments at AmInvestment Management, said on May 11.

“If the yield on the IDB sukuk is around 2 percent, I can get better yields from Malaysia,” he said. “There’s the possibility of the Fed increasing rates.”



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