Author: MUSHTAK PARKER | ARAB NEWS
Sunday 3 July 2011
Thus augurs well for the Malaysian market where a yield curve for sovereign sukuk is fast emerging given that the $2 billion offering is the third Malaysian sovereign global sukuk offering in the last 11 years.
More importantly, it sends a clear and present message to other member countries of the Islamic Development Bank that sovereign Malaysia is serious about developing critical mass in the Islamic capital market especially the sukuk market, and unlike countries such as Saudi Arabia, Kuwait, the UAE, Turkey, Egypt, Jordan and so on, it is putting its money where its mouth is. All the above countries have yet to issue a sovereign sukuk, and only Saudi Arabia, Jordan and Turkey sort of have the minimum required trust and sukuk laws in place to facilitate such offerings.
One reason that the global sukuk market has developed in such an erratic manner is the dearth of sovereign issuances to create a yield curve for such issuances and to stimulate an active international secondary trading market in such issuances, albeit some will be A-rated and the others investment grade rated.
The fact that the overall size of the two issuances is $2 billion, is a good omen, says Mohamed Tariq, senior adviser to the Islamic Development Bank (IDB). "Malaysia had only tapped 5-year maturity in the international market previously. In this latest issuance there are two tranches one of which has a 10-year maturity, which is first time that a global sovereign sukuk has been issued for that tenor. Malaysia is not in need of funds from the debt market as its external position is quite strong, but the A-rated issues will create more liquidity in the sukuk market for sovereign papers," he explained.
The $2 billion Wakala Sukuk like the two previous ones were 144A/Reg-S registered securities issued in this instance by Wakala Global Sukuk Berhad on behalf of the Malaysian government. This offering follows the first international sovereign sukuk pioneered by Malaysia in 2002 - a $600 million Sukuk Al-Ijara issued by 1 Malaysia Sukuk Global Berhad; and the country's second international Sukuk Al-Ijara offering in mid-2010 by the same special purpose vehicle to the tune of $1.25 billion.
The $2 billion sukuk comprises a 5-year $1.2 billion tranche which matures on July 6, 2016 and a 10-year $800 million tranche which matures on July 6, 2021. The settlement date for both tranches is July 6, 2011. The pricing reflected market appetite for the issuance. The yield for the 5-year tranche is 2.991 percent with a spread of CT5 + 145bps; and for the 10-year tranche was 4.646 percent with a spread of CT10 + 165bps respectively. The spread mentioned is not against LIBOR (London Interbank Offered Rate) but against the US Treasury, so the swap equivalent against the LIBOR will be different ie lower.
The above pricing is tighter compared with the final pricing for the $1.25 billion Malaysia Global Sukuk in 2010 which was priced at US Treasury 5-Year plus 180 basis points with yields touching 3.928 percent to be distributed on a fixed-rate basis annually. At the time the joint lead managers and bookrunners, CIMB of Malaysia, Barclays Capital and HSBC, maintained that the pricing reflected the lowest absolute yield achieved by an Asian sovereign in the past 5 years.
The Malaysians are bound to be pleased with the joint lead managers and bookrunners for the $2 billion Wakala Sukuk, namely the local Maybank Group and the CIMB Group, together with Citigroup and HSBC.
"The $2 billion government of Malaysia Global Wakala Sukuk offering," confirmed Zeid Ayer, chief investment officer, CIMB Principal Islamic Asset Management, "was extremely well received by the market. It was 4.5 times oversubscribed (a total of $9 billion in orders was received for a deal size of $2 billion) which is well over the 2-3 times figure we were expecting. The deal had two tranches, a five-year tranche ($1.2 billion in size) and a ten-year tranche ($800 million in size). A ten-year sukuk is very rare, especially in the global sukuk space, as issuances tend to be for a term of five years. This gave sukuk investors a very good opportunity to pick up longer-dated paper.
Pricing for both tranches tightened in by 15 basis points (bps) from initial guidance levels essentially reflecting the strong investor interest. Malaysia's good credit standing, the scarcity of US dollar-denominated debt from Malaysia, short supply of sukuk in general and the need on the part of investors to diversify their risk, all contributed to shore up interest in the deal." The offering also achieved lowest absolute yields by an Asian sovereign for a new US dollar issue.
The latest sukuk is also the first full global sovereign sukuk to be structured on a Wakala basis, where the issuer, trustee, lessor, and the purchaser and seller of the asset pool, is the Wakala Global Sukuk Berhad and the issuance like the previous two will have full recourse to the government of Malaysia. It is also the largest dual-tranche global sovereign US dollar sukuk ever issued and the first 10-year global sovereign US dollar sukuk.
The asset pool components comprise 52 percent tangible assets consisting of lease assets which will be redeemed at maturity and 42 percent Murabaha receivables arising from the sale of Shariah-compliant commodities which will be the initial investment.
The transaction attracted interest from a diverse group of domestic and international investors. The allocation was well-spread out globally, with 29 percent of the sukuk distributed to the Middle East, 27 percent to Malaysia, 22 percent to the rest of Asia, 14 percent to Europe and eight percent to the US.
The deal was priced after a roadshow across global financial centers, including Kuala Lumpur, Hong Kong, Singapore, Abu Dhabi, Dubai, Riyadh, London and New York.
The third Malaysia global sukuk is listed on the Hong Kong Stock Exchange, the Labuan International Financial Exchange and Bursa Malaysia.
The investor demand for the 5-year $1.2 billion tranche resulted in 175 orders totaling $5 billion. Middle East investors, bereft of similar sovereign offerings in the region, accounted for 43 percent of the subscription; followed by 26 percent by Malaysian investors; 18 percent from Asia; 9 percent from Europe and 4 percent from the US. In terms of investor type, banks accounted for 56 percent; sovereign wealth funds and government linked companies for 24 percent; investment funds for 17 percent; insurance companies for 2 percent and private banks for 1 percent.
Similarly, the investor demand for the 10-year $800 million tranche resulted in 154 orders totaling $4 billion. Middle East investors, perhaps favoring more medium-term exposure, accounted for only 7 percent of the subscription; followed by 28 percent by Malaysian investors; 29 percent from Asian investors; 21 percent from Europe and 15 percent from the US, perhaps indicating that the more experienced investors from the Europe, the US and Japan prefer longer-term Malaysian sovereign risk exposure. In terms of investor type, banks accounted for 26 percent; sovereign wealth funds and government linked companies for 19 percent; investment funds for 45 percent; insurance companies for 8 percent and private banks for 2 percent.
The successful closure of the Malaysia Global Wakala Sukuk at the final pricing is even more remarkable given that it happened smack in the middle of the Greece sovereign debt crisis, which had an upward impact on bond prices in general and which was responsible for potential issuers including from Asia postponing planned bond offerings in the US dollar market.