Palm | Kelapa Sawit

Malaysia is said to be planning a 10- year dollar-denominated Islamic bond, its second sovereign sale of Shariah-compliant debt in a year, four people familiar with the matter said.

The deadline for the request for proposals from bankers has closed and the government has yet to take a final decision, said one of the people, a government official who couldn’t be named as the matter is confidential. Three local investment banks submitted pitches proposing a size of $500 million, which can potentially be raised to $1.7 billion, three of the people said.

An offering of 10-year overseas Islamic debt would set a benchmark for the $1 trillion industry, where issuers tend to favor shorter maturities such as five years or less. The government may be willing to pay a higher yield on the notes than non-Shariah-compliant bonds because it wants to strengthen Malaysia’s position as the global hub for Islamic finance and the biggest market for sukuk, the people said.

“Malaysia’s sovereign bonds have always been sought after because they are rare,” Lum Choon Kuan, head of fixed-income research at CIMB Investment Bank Bhd., a unit of Malaysia’s second-biggest bank, said in a telephone interview in Kuala Lumpur today. Proceeds are likely to be used to part-refinance a $1.75 billion non-Islamic, dollar-denominated bond that matures in July, he said.

Ringgit Sales Surge

The Southeast Asian nation sold $1.25 billion of the five- year dollar-denominated Islamic bonds in May last year at a 180 basis-point premium over U.S. Treasuries. The yield difference has since shrunk to 97 basis points today, approaching a March 31 low of 88 basis points, according to data compiled by Bloomberg.

The yield on the 3.928 percent sukuk maturing in June 2015 was little changed today at 2.45 percent, prices from Royal Bank of Scotland Group show. It reached 2.33 percent on Nov. 4, the lowest since the debt was sold.

Sales of ringgit-denominated Islamic bonds rose 72 percent this year to 12.4 billion ringgit ($4.1 billion) from the same period in 2010, Bloomberg data show. The government has announced a $444 billion 10-year development plan that includes a mass railway in Kuala Lumpur. Malaysia may also sell local- currency sukuk to help finance the construction of the 48 billion ringgit network, Prime Minister Najib Razak said on March 29.

Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, climbed to $5.9 billion this year, from $5.4 billion in the same period of 2010, according to data compiled by Bloomberg.