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PETALING JAYA: Tenaga Nasional Bhd (TNB) will raise RM5bil from a 20-year ringgit-denominated sukuk issuance at the end of next month to finance the extension of its Janamanjung power plant.

This comes at a time when the national utility company is facing a severe gas supply shortage that may result in it incurring additional fuel cost.

In a Bernama report on Thursday, TNB president and chief executive officer Datuk Seri Che Khalib Mohd Noh said the group would do its book-building exercise in the third week of October. “The timing is good as the domestic market is now flush with liquidity,” he said.

In April, TNB awarded French group Alstom a 650-million-euro (RM2.8bil) contract to build the Janamanjung 1,000-MW supercritical coal-fired power plant.

Alstom will engineer, procure, construct and commission a 1,000-MW steam turbine, a generator, a supercritical boiler and auxiliaries. The plant is expected to come online in 2015.

The plant will be the single largest in South-East Asia and will produce enough electricity to power nearly two million households in the country.

The project follows TNB's 1999 contract with Alstom to build the currently operating 2,100-MW Manjung coal-fired power plant.

The supercritical power plant operates at a higher temperature than regular coal-fired power plants. Its high temperature increases the pressure at which it operates, which in turn improves its efficiency, increasing the amount of power output and decreasing emission per unit of fuel burned.

Meanwhile, TNB is still bogged down by cost concerns whereby it may incur additional fuel costs of up to RM3bil.

On Tuesday, Che Khalib said the company's fourth-quarter performance would be weak and his earnings estimate for 2011 had gone haywire and had been cut by more than 50%, marred by a continued gas supply shortage.

Analysts have said the gas shortage might only be permanently resolved by the second half of 2012, when Petronas Gas' regasification terminal in Malacca was operational and Malaysia started importing liquefied natural gas at market prices.

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Malaysia's latest issue of five-year global bonds advanced on their first day of trading after yesterday's sale attracted orders for more than five times the US$1 billion (RM3.3 billion) originally sought.

The Islamic notes due June 2015 yielded 3.87 per cent early yesterday in Hong Kong, six basis points less than the 3.93 per cent the securities were priced at in yesterday's sale, according to data provided by Barclays plc, one of the deal's three arrangers. That's 171 basis points more than similar-maturity US Treasuries, nine basis points less than when the bonds were sold.

"Malaysia is oil-rich, the fundamentals are solid and they don't have funding needs," Paul Chan, the Hong Kong-based chief investment officer at Invesco Asia Ltd, said before the sale. "There will be scarcity value in Malaysia's dollar bonds. Asian countries are generally underrated" given what's happening in Europe, he said.

Malaysia's sale of so-called sukuk notes, its first international debt issue since 2002, will set a new benchmark for pricing bonds in the nation, Prime Minister Datuk Seri Najib Razak said on May 19.
The government sold US$1.25 billion (RM4.1 billion) of the securities, after attracting orders of almost US$5.5 billion (RM18.2 billion), according to a sale document obtained by Bloomberg. CIMB Group Holdings Bhd and HSBC Holdings plc, along with Barclays, arranged the offering.

Islamic bond sales are growing for the first time since 2007 as yields on securities complying with the religion's ban on interest fall more than those on emerging-market debt even as Europe's debt crisis worsens.

Offerings of sukuk have climbed 10 per cent to US$6.1 billion (RM20.2 billion) so far this year, the most since a 47 per cent increase in the same period three years ago, according to data compiled by Bloomberg.

Malaysia has the world's biggest market for Islamic bonds, which are backed by physical assets and pay profit rates instead of interest that is prohibited under syariah principles. The country accounted for 65 per cent of outstanding sukuk last year, according to CIMB Group Holdings Bhd, one of the lead arrangers for the latest notes.

The sukuk, which is of the Ijarah structure, were assigned debt ratings of "A-" by Standard & Poor's (S&P) and "A3" by Moody's Investors Service last week, the two company's fourth lowest investment grades. Greece, which sparked the European debt crisis amid concern about its ability to repay investors, has a junk, or high-risk, rating of "BB+" from S&P.

The premium investors demand to hold bonds in developing nations over US Treasuries narrowed 20 basis points yesterday to 319 basis points, according to JPMorgan Chase & Co's EMBI+ Index. A basis point is 0.01 percentage point.

Malaysia's latest bond issue would pay returns with rental income received by leasing 12 state-run hospitals, according to a sale document obtained by Bloomberg News last week.

State-owned Petroliam Nasional Bhd's (Petronas) 4.25 per cent Islamic bonds due August 2014 yielded 3.92 per cent yesterday, according to Royal Bank of Scotland Group plc, or 207 basis points more than similar-maturity Treasuries.

"Usually the trading differential between Petronas and Malaysia is 20 or 25 basis points, so that's what I was expecting," said Brayan Lai, a Hong Kong-based credit analyst at Credit Agricole CIB. "The issuer came into a rally in the markets, so they probably got a good deal." - Bloomberg

source HERE

Sales of Islamic bonds may increase 24 per cent this year, led by Southeast Asia, as the region’s expansion helps drag the world out of recession, said CIMB Group Holdings Bhd, the leading arranger of such issuance.

Global sales of bonds that comply with the religion’s syariah principles, known as sukuk, will probably reach US$25 billion this year, Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd, a unit of CIMB Holdings, said in an interview yesterday. Gulf issuance will fall after Dubai World’s attempt to reschedule US$22 billion of debt eroded investor confidence, he said.

“Economic growth will trigger the need for funding,” said Badlisyah, whose bank handled 22 per cent of global sukuk sales in 2009. “Most sales will come from this part of the world,” with countries including Indonesia and Thailand “moving aggressively to facilitate the industry,” he said.

Sukuk sales rose to US$20.15 billion last year from US$14.13 billion in 2008, according to data compiled by Bloomberg. Islamic finance bans the payment of interest and stipulates agreements be based on the transfer of goods or services.
The Islamic finance industry’s assets under management may swell to US$2.8 trillion by 2015 from about US$1 trillion as Muslim wealth increases, according to the Kuala Lumpur-based Islamic Financial Services Board. The assets of the top 500 Islamic banks expanded to US$822 billion last year from US$639 billion in 2008, Standard & Poor’s said Feb. 1.

Developing East Asia, which excludes Japan, Hong Kong, Taiwan, South Korea and Singapore, will grow 8.1 per cent this year, faster than a November estimate of 7.8 per cent, the World Bank said on Jan. 21.

Malaysia Dominates

Malaysia, which accounted for about half global sukuk sales in 2009, will continue to dominate the sales, followed by Indonesia, which has the world’s largest Muslim population, Badlisyah said.

Thailand plans to sell as much as 50 billion baht (US$1.5 billion) of Islamic bonds in the third quarter to fund infrastructure projects, the Islamic Bank of Thailand said on Feb. 1. Indonesia plans to sell 3 trillion rupiah (US$319 million) of Islamic bonds to individuals this month, the finance ministry’s debt management office said in January.

Malaysia has eased foreign ownership rules and approved new products as part of efforts to become a hub for Islamic financial products. It also plans to issue new Islamic banking licenses and two new permits to sell Islamic insurance.

Thailand will introduce new rules in the first quarter to allow local companies to sell Islamic bonds for the first time to provide them with a new source of funding, the country’s Securities and Exchange Commission said in November. -- Bloomberg

source HERE

DUBAI (Zawya Dow Jones)--Dubai said Monday that it has received $10 billion in financing from Abu Dhabi, which will pay part of the debt held by conglomerate Dubai World and its property unit Nakheel.

Out of this, $4.1 billion will be used to repay Nakheel's Islamic bond, or sukuk, that matures Monday. The remainder of the funds will be used to finance Dubai World's needs up until the end of April 2010.

"We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices," Sheikh Ahmed bin Saaed al-Maktoum said in a statement.

Dubai rocked world markets in late November when it requested a freeze on debt payments by Dubai World in order to restructure the conglomerate. Nakheel's bond had been seen by many as a litmus test for Dubai's ability to repay more than $80 billion of government and corporate debt.

"I think Abu Dhabi saw the adverse market reaction to Nakheel debt restructuring news play out over several days and perhaps decided they had seen enough," said Saud Masud, senior real estate analyst at UBS AG.

Talk that Nakheel could reach a positive outcome helped boost shares in Dubai on Sunday.

The Dubai Financial Market's main index closed up 3.3% at 1695.35, extending Thursday's 7% rally. However, the benchmark is still down about 19% since Dubai World requested the debt freeze.

"This is very positive news, and will be welcomed relief to bondholders in particular. We are expecting a strong positive reaction to U.A.E. and regional markets," said Ali Khan, managing director at Arqaam Capital. "Details yet to emerge, however headline is very positive."

In its statement, Dubai said it will focus on addressing the concerns of Dubai World's creditors and will start discussions with creditors and contractors shortly.

source HERE

- Clive Maund

What was really odd about yesterday was that we saw a big dollar breakout, but Treasuries fell heavily. We are now believed to be on the verge of another massive deflationary downwave, similar to last year, but worse. However, this time it is very possible that while we will see a flight to cash, we will not witness a stampede into Treasuries, or at least not on anywhere near the same scale. So what is going on here? - what are the principal underlying dynamics? Anyone who has had the misfortune to watch a nuke exploding, misfortune because you get irradiated, knows that first you see a very bright flash, then there is a period of tranquillity as the flash dies down and the mushroom cloud starts to rise, before the shockwave hits, when things get pretty rough to say the least.

Youv'e seen the flash - now get ready for the shockwave...

What happened in Dubai just over a week ago was the bright flash, and the media have used the intervening period before the shockwave hits to reassure everyone that everything is going to be just fine - "You just relax, nothing will come of it, it's only $60 billion down the drain or whatever - have a cup of tea". The trouble is that it's not $60 billion at all - the reality is that this is a default on a massively larger scale. Dubai was a vast sinkhole into which western banks and governments unquestioningly poured not just billions but trillions of dollars which was then leveraged enormously by means of derivatives enabling Dubai to build itself up into a latter day Rome, with a level of opulence and extravagence that would have made Caesar green with envy.

When people think of Dubai the things that come to mind are the massively extravagent 7-star hotels, the towering record breaking skyscraper, palm-shaped island resort complexes etc and forests of new office buildings and apartments etc. What the vast majority don't realize is that the stupendous leverage afforded by derivatives has in addition enabled Dubai to create an immense global empire of businesses, most of the elements of which are broke, having racked up staggering levels of debt. Dubai is the nexus of the derivatives pyramid and it is flat, stony broke.

Where did all the money come from to pay for all these things? - why from taxpayers and pension fund contributors the world over of course, but especially in the US, with Wall St acting as a giant conduit sluicing a torrent of cash into Dubai. The interesting thing is that there was never any accountability - countries and companies vied with each other for the privelege of pumping money into the exalted kingdom, seduced by its supposedly limitless oil wealth, and requesting or requiring guarantees was regarded as impolite. Now that Dubai is broke, the Dubai government has suddenly distanced itself from Dubai World, and the attitude towards the Western banks and governments who have poured trillions into Dubai is "Tough luck - you lose, suckers".

What this means is that trillions of dollars which are now counted as assets on the balance sheets of banks worldwide and especially in the US are actually liabilities. So what do you think is going to happen to the stock prices of these banks - and stockmarkets generally, when the world wakes up and acknowledges this reality - when the shockwave hits?? Small wonder that the charts for Goldman Sachs and J P Morgan look very like the market charts before the '87 crash, but that was "small potatoes" compared to what is coming down the pipe this time.

Introducing Sukuk: Islamic Loophole for Dubai Debt Debacle

Islamic followers can be capitalists too. Although oil prices (currently around $77 per barrel) have fallen from the peak near $150 per barrel in 2008, oil rich nations have gotten creative in how they raise debt-like financing. Critical to fueling the speculative expansion in some oil rich areas has been the growth in sukuk bonds, which have been created as a function of loophole exploitation in Islamic finance principles.

U.S. Does Not Have Monopoly on Debt Driven Greed

The pricked debt bubble that spanned the range of Icelandic banks to Donald Trump (read more) has now spread to Dubai commercial real estate, evidenced by the plastering of recent global headlines. At the center of the storm is Dubai World, a quasi-government owned conglomerate of Dubai, which is in the process of negotiating a $26 billion debt restructuring with the government and sukuk bondholders.

This overleveraged Dubai market ($80 billion in total debt) helped finance the tallest building in the world, largest man-made islands, and a ski-resort based in the desert, in the face of collapsing real estate prices. Critical to Dubai World’s debt restructuring is a $3.5 billion sukuk bond issued by its commercial real estate subsidiary Nakheel Development (“Nakheel”). So what exactly is a sukuk (plural of sakk)?

Investopedia lists the following definition for sukuk:

“An Islamic financial certificate, similar to a bond in Western finance, that complies with Sharia, Islamic religious law. Because the traditional Western interest paying bond structure is not permissible, the issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.”

more HERE

PETALING JAYA: The debt payment crisis of conglomerate Dubai World will not adversely affect the Islamic finance industry in Malaysia as it has limited exposure to the sheikhdom’s debt, according to industry observers.

CIMB Islamic Bank Bhd CEO Badlisyah Abdul Ghani said the situation in Dubai was purely a credit issue and applicable for both conventional interest-based and Islamic capital market in the Middle East.

Credit issue was not exclusive to Islamic capital market and the problem Dubai was facing had no bearing on the structure of the sukuk market or its instruments in particular, he said in an email reply to StarBiz.

“What’s happening in Dubai has no impact on Islamic finance in Malaysia as Malaysian Islamic banks are not exposed to the Dubai market, with most concentrating on doing business in Malaysia only or regionally in South-East Asia. If (there is) any, exposure would be extremely insignificant,” he added.

The Malaysian Islamic finance industry, he said, was unparallelled in terms of depth and sophistication and had gone through two major global financial crises with one involving Malaysia directly and emerged practically unscathed both times.

Ernst & Young Advisory Services head of assurance Abdul Rauf Rashid agreed, saying that there was limited direct implication to the local financial industry as not many investors were directly exposed to Dubai or papers issued by organisations from the Gulf Cooperation Council (GCC) countries.

In response to a query, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said: “The Malaysian conventional and Islamic banks have limited exposure to Dubai and the recent development has not had an impact on their operations.

“The fundamentals of the banking system remain strong and continue to support the economic recovery process.”

more HERE

above. Photograph: Steve Crisp/Reuters

By Robin Wigglesworth

Dubai’s request for a debt standstill for one of its largest state-owned conglomerates has raised the possibility of the largest Islamic bond default on record, rattling the global Islamic debt markets.

Nakheel, the Dubai developer behind many of the emirate’s gaudiest projects, has to find $4bn to repay an Islamic bond, known as sukuk, by December 14.

The Nakheel sukuk has been seen as an important indicator of how Dubai will manage the liabilities of its multifarious government-related entities, but a failure to repay the bond fully and on time could impact the global sukuk market, estimated at over $100bn. “There is a lot of shock and a little bit of anger,” said Nish Popat at ING Investment Management in Dubai.

“This is a major blow to the sukuk market. If it defaults, it would be the third one in the Gulf, and the largest Islamic bond default ever, and we’re still waiting to see how sukuk-holders are treated in situations like this. There aren’t any precedents.”

The sukuk market has already been rocked by its first big defaults this year, which many say will represent test cases for how debt-holders are treated in the case of restructuring or bankruptcy. Sukuk are based on Islamic law, or shariah, which bans interest and requires a tangible asset to underlie financial transactions.

They are structured so that investors typically receive income from a rent-generating asset, which is technically transferred to a third-party vehicle owned by the sukuk-holders for the duration of the bond. Nakheel’s Islamic bond, issued in 2006, is backed by land in Dubai.

Experts say that in most cases investors do not have legal recourse to the underlying asset. However, until a sukuk default is satisfactorily settled, uncertainty will cloud the market.

An investor in the Nakheel sukuk said: “This is mostly a Dubai issue, not a sukuk issue... (but) a default would obviously be negative for the sukuk market.”

source HERE

Will my Public Islamic Income Fund be affected by this Dubai Debt Crisis?
Wait and see...

* Middle East: Thursday, July 03 - 2008 at 13:13

In the middle of June UK gilts had their biggest sell-off for years as markets digested the thought of what higher interest rates to tackle inflation might mean for bond prices. Inflation is bad news for bonds. Inflation tends to push up interest rates so fixed interest rate instruments decline in value. In the Gulf that means sukuks.

Sukuks have become very popular in the region, combining the ethical appeal of Islamic banking with exposure to local currencies which are thought likely to revalue upwards.

And international banks have rushed to join the sukuk issuance bandwagon over the past couple of years, sometimes displacing the local banks, even the Islamic ones.

Investors have, from time to time, wondered about the return on offer from sukuks. Earning 2.5% above Eibor on sukuk from the Dubai Electricity and Water Authority does not look like a great return: 4.5% 'profit' as interest on sukuk is termed, despite the geopolitical risk of the Gulf, is not a great deal.

Indeed, with UAE inflation above 10% - some say as high as 20% this year - this is a negative real rate of return on this investment. A few years of inflation roaring at this kind of level and your sukuk is going to be worth a lot less in real terms than you paid for it.

Likely Eibor rise

Disastrous bond investment