Malaysian Airlines aims for landmark Islamic bond
MANAMA May 28 (Reuters) - Malaysian Airlines (MAS) has proposed the world's first corporate perpetual sukuk, a debt-equity hybrid, its top official said, hoping to raise up to 2.5 billion ringgit ($798 million) from the Asian state's Islamic capital markets.
The structure, approved last week by the country's regulator, further blurs the traditional definition of sukuk as a fixed-income instrument and aligns it closer to an equity instrument, as viewed by industry purists.
"This is a market-leading, innovative structure," MAS Chief Executive Ahmad Jauhari Yahya told Reuters, without giving a timeline for the sukuk issuance.
The perpetual sukuk, which will be unrated, is part of a three-pronged funding plan aimed at alleviating the carrier's debt burden, with current liabilities increasing by 18.8 percent in the last quarter.
Islamic bonds, or sukuk, adhere to religious principles that forbid such practices as gambling, speculation and charging interest.
The latter is a sore point in the Islamic finance industry as certain sukuk structures are viewed as being too close to conventional bonds with returns resembling interest-bearing securities.
Perpetuals, on the other hand, are classified as subordinated debt and are more akin to equity: they have no maturity, pay a coupon indefinitely and are callable by the issuer after a predetermined number of years.
MAS, majority-owned by Malaysian sovereign wealth fund Khazanah Nasional, said the sukuk will be callable after 10 years and its payment obligations will rank ahead of equity but remain subordinated to or on par with other creditors.
The carrier, which gets its first of six Airbus A380s in July as it overhauls an ageing fleet, will use the aircraft as collateral for the perpetual - also known as a consol, a reference to British government bonds issued as far back as 1751.
DEEP MALAYSIAN LIQUIDITY POOL
The sukuk will use two Islamic finance structures - musharaka and musawama - to create the perpetual and address the possible deferral of payment of coupons, according to a company filing.
Musharaka is a common profit-sharing certificate which would set up the initial sukuk and musawama is a negotiated-sale arrangement that would allow MAS to defer the periodic coupon payments if needed.
An added benefit of the perpetual to MAS would be the ability to recognize the sukuk as equity on its balance sheet, and the capital increase will in turn help the company lower its debt-to-equity ratio.
"The bulk of the issue size, if not all, would be recognized as equity capital in MAS' balance sheet," Yahya told Reuters.
Short-term liabilities are a key concern for MAS - its current ratio, a measure of a company's ability to meet short-term obligations, has fallen to 0.38 in the last quarter compared with 0.74 in December 2010.
MAS is seeking to streamline operations and shift to more fuel-efficient aircraft amid volatile fuel costs.
The airline opted for a ringgit-denominated issuance despite fuel costs being US-denominated and representing 38 percent of expenses in the last quarter.
"Our ringgit revenue base provides a natural hedge in supporting the ringgit sukuk ... a lot of other costs are in ringgit," Yahya said.
A buoyant local market might have added weight to the choice of currency.
"There is deep Islamic investor base in Malaysia, and we could tap into this funding more competitively," Yahya said. (Reporting by Bernardo Vizcaino; Editing by Erica Billingham)
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