Sime Darby launches first Islamic bond issue

The leading Malaysian conglomerate comes to market with a long awaited deal.

Joint lead managers HSBC and CIMB soft launched an inaugural Islamic bond deal for Malaysian conglomerate Sime Darby on Friday. The bond is being marketed to investors in Malaysia before an official launch on January 15th.

The leads are looking at a deal up to RM500 million ($132 million) in size with a maturity of five years, seven years or a combination of both. The bonds will be rated AAA by the Malaysian domestic rating agency MARC.

The issue is the first to come off Sime Darby's Islamic CP/MTN programme. This programme was approved by the Malaysian sSecurities Commission in August 2002 and its information memorandum was launched in December last year. Indeed, investors have known for some time that this bond was coming and the book build should be relatively smooth, according to sources close to the issue.

This transaction will be structured as an Islamic murabaha transaction. This means the deal will be a cost plus financing where the investors effectively buy goods and services and then on sell them to the company with a deferred payment of profits. As such, the company is saying that the use of proceeds will be for general corporate funding exercises but is not revealing which specific projects.

The key task for the lead managers now is to determine the pricing level. Understandably, Sime Darby is keen to get the tightest pricing possible for its first bond deal, as this will be the benchmark for all future transactions. In this, Sime Darby's strong rating and its rarity value will help the issue. Indeed, the company has a very diversified set of businesses, from power generation to palm oil plantations, to motor distribution. While investors traditionally tend to apply a conglomerate discount these days, Sime Darby benefits from having a very low gearing level of under 10% which bankers believe should attract investor interest. The company has also been enjoying a very strong year in 2002 helped by buoyant palm oil prices. Indeed, in its latest quarterly results for the quarter ending September 30th 2002, the company earned RM214 million, a 17% increase on the same quarter last year.

However, there are no direct comparables in the Malaysian bond market for the leads to use for price guidance. The closest deal in the market is the huge BAIDS series of bonds for toll road operator, PLUS. These are the most comparable AAA rated corporate bonds in the market and trade around 90bp over Malaysia Government Securities, which in turn are trading at around 3.1%. Therefore the leads will probably be looking to price the new issue around 4%, flat to the PLUS bonds. Co-arrangers on the deal are KAF Discount and Aseambankers.

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