Malaysia’s Bumi Armada Bhd plans to sell a debut Islamic bond, adding momentum to issuance that’s surged 80 per cent this year in the world’s biggest sukuk market.

Billionaire T. Ananda Krishnan’s oil and gas company is setting up a RM1.5 billion (US$459 million) sukuk programme in its first debt offering, a stock exchange filing showed. Bumi Armada’s shares have rallied to a seven-week high after it won a US$2.9 billion contract in Angola, and CIMB Group Holdings Bhd predicts further gains through 2014.

Investor confidence in emerging markets got a boost this week after Federal Reserve Chair Janet Yellen said the US economy will need monetary stimulus for some time, sending dollar-denominated debt yields in developing nations to a five- month low. Islamic bond offerings in Malaysia climbed to RM18.7 billion in 2014, with RM6 billion completed in the past two weeks, data compiled by Bloomberg show.

“Bumi Armada’s plan to tap the sukuk market is a recognition that bodes well for Islamic finance,” James Lau, who helps manage US$300 million as director of investment at Pheim Asset Management Sdn Bhd in Kuala Lumpur, said in a telephone interview yesterday. “The company is a well-known major player in the oil and gas field and hasn’t disappointed the market.”

The sukuk, which aren’t yet rated, will be sold via the special purpose vehicle Bumi Armada Capital Malaysia Sdn Bhd, according to the March 26 filing. The funds will used to finance capital expenditure and day-to-day costs for the group’s projects, it said, without providing details on maturities.

Assuming it’s a top-rated bond, the company may have to pay 80 basis points to 90 basis points more than similar-maturity non-Islamic government notes given the prospect of rising interest rates, according to Manulife Asset Management Sdn Bhd.

Yields on three-year corporate non-Shariah-compliant notes, rated the highest investment grade of AAA, have climbed 15 basis points this year to 3.86 per cent, a level last seen in July 2009, a Bank Negara Malaysia index shows. The 10-year equivalent rose 33 basis points, or 0.33 percentage point, to 4.79 per cent.

“While current market conditions are stable for issuers, Bumi Armada will still have to pay a premium,” Elsie Tham, a senior fund manager at Kuala Lumpur-based Manulife Asset, who oversees more than US$1 billion, said in an phone interview yesterday. “This is because investors want to be compensated for a possible rate increase.”

The Fed has trimmed its bond-purchase program, which had driven cash into emerging markets, in US$10 billion increments this year to US$55 billion from US$85 billion in 2013. Yellen said March 19 that US interest rates could start rising about six months after the stimulus ends later this year.

One-year interest-rate swaps in Malaysia have climbed 10 basis points in 2014 to 3.50 per cent, signaling the central bank will raise borrowing costs by as much as 50 basis points from the current three per cent.

The Fed’s most recent outlook cut yields on developing- market debt by two basis points in the first three dais of this week to 5.86 per cent after Yellen’s latest comments, adding to a 19 basis point drop in the five days through March 28, according to JPMorgan Chase & Co.’s Emerging Markets Bond EMBI Global Index. Yields reached 5.83 per cent on April 1, the lowest since November.

Global sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, rose 5.4 per cent in 2014 to US$13.8 billion from a year earlier, after reaching US$43 billion last year and an unprecedented US$46.5 billion in 2012, data compiled by Bloomberg show.

CIMB Group, the top Islamic bond arranger this year, forecast last week that worldwide issuance could exceed the record in 2014 as Asia and the Middle East ramp up development spending to build roads, ports and railways.

The Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index, which tracks the most-traded ringgit-denominated notes, dropped 0.1 per cent in the first three days of this week to 104.691. It’s fallen 0.4 per cent since December 31.

Bumi Armada has appointed Maybank Investment Bank Bhd as the lead manager for its bond offering. The company secured a contract from Italy’s Eni Spa this week for a floating production, storage and offloading facility in Angola.

CIMB predicted on April 1 that Bumi Armada’s shares will rise to RM4.56 in 12 months citing good earnings “visibility,” which would represent a 13 per cent increase from RM4.04 in Kuala Lumpur as of 10.11a.m. Alliance Research Sdn Bhd., a unit of Alliance Bank Malaysia Bhd, said the same day it has RM4.50 price target and recommends buying the stock.

The company is forecast to report a 44 per cent increase in net income to RM621.5 million in 2014, according to average estimates of 20 analysts surveyed by Bloomberg News.

Bumi Armada generated RM786 million in revenue from Asian markets excluding Malaysia in 2012, compared with RM290 million domestically, data compiled by Bloomberg show. Africa, was its second-biggest market with RM473 million, followed by Latin America with RM110 million.

“The fact Bumi Armada opted for the ringgit sukuk market instead of the international one shows that Malaysia’s Islamic industry has matured,” Mohd. Effendi Abdullah, head of Shariah-compliant markets at Kuala Lumpur-based AmInvestment Bank Bhd, said in a phone interview yesterday. “This will encourage more local and foreign companies to issue locally.”-- Bloomberg