based banks and companies, struggling to overcome a lack of investor confidence after the Dubai debt crisis, are increasingly looking toward Malaysia, the world's biggest Islamic bond market with a vast pool of cash. After the burst of the Gulf real estate and asset bubble, institutions are keen to issue bonds in order to restructure debt and rebuild their balance sheets and Malaysia has an estimated $79 billion in excess liquidity, according to Kuwait Finance House. "The liquidity pool has definitely shifted from West to East," said Nida Raza, senior vice president at Unicorn Capital. "Malaysia is an isolated, internal market that has been relatively unaffected by the global liquidity crunch." While Gulf-based issuers appear eager to strengthen their ties to growing Asian economies and markets, they are weighing that against the market's ability to absorb debt, currency risks and the time needed to build the right offerings. In Dubai, worst hit in the Gulf by the financial crisis, the government and state-linked enterprises will have to cover an estimated $30 billion in debt maturing over the next two years. Dubai is eyeing a $1.5 billion, multi-currency sovereign Sukuk in Malaysia - the first ever ringgit-denominated foreign sovereign issue. Malaysia accounted for 42 percent of the global Sukuk issuance of $19.1 billion last year, Thomson Reuters data showed. In the first nine months of 2010, ringgit-denominated Sukuk deals made up 63.8 percent of total Islamic bonds issued globally, KFH said. "The market infrastructure for bonds and Sukuk are far more developed in Asia," said Jarmo Kotilaine, chief economist at NCB Capital. "There is a fairly sophisticated secondary market in Malaysia that builds broader awareness of a (Gulf company) as an issuer." Unlike the Gulf, where investors usually opt to buy and hold bonds until maturity, there is a far more active secondary market in Malaysia with larger trading volumes. Malaysia also has better regulation by the central bank, which has more detailed rules for Sukuk issuance, while in the Gulf there is a lack of standards that some experts warn could hobble the growth of Islamic finance. Feeding into Malaysia's pool of liquidity is the country's strong fiscal position, supported by exports this year and robust domestic demand. The International Monetary Fund expects Malaysian GDP to grow 7 percent this year. The Gulf bond market is staging a tentative revival with a Dubai sovereign bond and issues from Qatar Islamic Bank and the Saudi-based Islamic Development Bank among others in recent months. Potential ringgit issuers are treading cautiously though to see how others fare before aggressively issuing, said Rizwan Kanji, a Dubai-based debt capital markets lawyer. Although bankers said it was too early to speculate on how much total debt is being prepared for issuance in Malaysia, each will probably near the scale of existing ringgit Sukuk. In recent months, both National Bank of Abu Dhabi and Abu Dhabi Commercial Bank tested the waters with NBAD issuing a 500-million-ringgit ($158.6 million) Sukuk while ADCB followed with a 750-million-ringgit conventional bond. Both issues were widely oversubscribed and have held up well in the secondary market with both rising since their launch, indicating good demand, regardless of the yield. For Asian investors, ringgit-based bonds with Gulf names provide a way to diversify their portfolios while avoiding risk related to currency fluctuations. That offers an opportunity that many Malaysia funds with restrictions on investing in currencies other than the ringgit will find appealing, said Kanji. Dubai's planned sovereign Sukuk, timed as the state seeks a new investor base after its battering during the financial crisis, should provide a good indication of Malaysia's risk appetite for Gulf-based paper. The issue would have to be rated by a local Malaysian rating agency and analysts say it would need to be rated at least A
