Cagamas to Favor Islamic Bonds in Bid to Boost Investor Demand

Cagamas Bhd., Malaysia's biggest buyer of home loans, plans to increase sales of Islamic bonds as part of an effort to boost investor appetite for its debt after mortgage defaults triggered the global credit slump.

Cagamas, which expects to sell as much as 15 billion ringgit ($4.2 billion) of notes next year, wants overseas investors to hold about 20 percent of its bonds from about 10 percent now, Chief Executive Officer Steven Choy said in an interview on Nov. 18. About 30 percent of its bonds comply with Muslim Shariah law's ban on interest, he said.

Borrowers sold $13.1 billion of Islamic bonds this year after raising a record $30.8 billion from the securities in 2007 as an oil boom boosted Middle Eastern wealth, data compiled by Bloomberg show. Malaysia, which accounted for two-thirds of global Islamic bond sales last year, expects sales of the notes, known as sukuk, to increase by 20 percent annually.


``Mortgage-backed bonds are not very popular right now with the subprime issue'' and it may be easier for Cagamas to sell sukuk, said Jason Chong, who helps oversee $1.6 billion as chief investment officer at UOB-OSK Asset Management in Kuala Lumpur.

Bonds linked to U.S. residential mortgages slumped last week after Treasury Secretary Henry Paulson abandoned plans to buy distressed securities using money from the $700 billion Trouble Asset Relief Program, set up to try to ease the credit crisis started by U.S. subprime mortgage defaults.

Record Yields

Yields on the safest types of AAA rated commercial-mortgage bonds rose 77 basis points to a record 1,195 basis points more than benchmark swap rates yesterday after a Credit Suisse Group AG report indicated two U.S. property owners with about $334 million of loans bundled into bonds are about to default. A basis point is 0.01 percentage point.

"Although oil prices have come down, oil-rich countries are still making loads of money so there is a need to park this money somewhere,'' said Chong. "Pension funds and insurance companies would look for safer paper, such as Cagamas', because they are backed by the government.''

Unlike Fannie Mae and Freddie Mac, the mortgage-finance companies taken over by the U.S. government, Cagamas buys loans with recourse to the lenders and so isn't at direct risk of borrower defaults, according to Choy, who has been traveling to Hong Kong, Europe and the Middle East for promotional meetings.

"Investors buy our bonds because, for the ratings that we have, we offer a higher return,'' he said in Kuala Lumpur.

Local Ratings

Cagamas, set up in December 1986, is 20 percent-owned by the Malaysian central bank and buys housing loans from banks, funding purchases by selling bonds.

Its debt, which isn't rated by either Moody's Investors Service or Standard & Poor's, has the highest AAA credit rating from the local Malaysian rating agencies.

The company on Aug. 15 said it sold 2.02 billion ringgit of one- to 20-year sukuk in Malaysia's biggest sale of securities based on a commodity Murabahah. The notes were priced to yield between 4.05 percent and 6.5 percent.

A Murabahah contract is a sale and deferred-payment agreement based on an asset, usually a commodity, in which the cost and profit margin are pre-agreed to comply with Shariah.