The issuer, 1 Malaysia Sukuk Global Berhad, which issued the 144A/Reg-S registered securities on behalf of the Malaysian government, must have been pleased with the final pricing of the issue at US Treasury 5-Year plus 180 basis points with yields touching 3.928 percent to be distributed on a fixed-rate basis annually.

According to the joint lead managers and bookrunners, CIMB of Malaysia, Barclays Capital and HSBC, the pricing reflected the lowest absolute yield achieved by an Asian sovereign in the past 5 years. This sukuk is also the second bond to be issued by an emerging market country in the past five years to yield below 4 percent, and the first ever by an Asian emerging market sovereign issuer.

With an initial price guidance of US Treasury's plus 190 basis points, pricing was edged downwards because of a strong order book and investor demand. By the close of the order book, demand had increased to an overwhelming $6.0 billion from over 270 domestic and international investors, reflecting the confidence of the global investors on the strong macroeconomic fundamentals of Malaysia. Subsequently the offering was upsized to $1.25 billion at a final pricing of US Treasury 5-Year plus 180 basis points. The sukuk were subsequently issued with a five-year bullet with a maturity date of June 4, 2015.

An encouraging sign was that demand was particularly strong from Middle Eastern investors, who subscribed 26 percent of the allocation. In fact, the IDB pledged to take 10 percent of the final issue size which they were allocated, although the Malaysian government was keen on the IDB to take a greater lead with a higher subscription. Sources also stressed that three GCC central banks subscribed through their sovereign wealth funds (SWFs) which have hitherto been conspicuous in their absence in their involvement in the Islamic capital markets.

"We were eventually happy with the outcome and the pricing. The Malaysians wanted us to commit upfront to a huge subscription, but we are obliged like any other multilateral development bank to see how the order book developed and the pricing and yield dynamics turned out. The market forecast is difficult for the next few weeks. As such if trading suffers then the spreads would also come down. However, we have great confidence in sovereign Malaysia, which is clearly very proactive in the Islamic capital markets space," explained one GCC banker.

Others stress that the A3 (stable) by Moody's Investors' Service and A- (stable) by Standard & Poor's (S&P), further inspired market confidence in the issuance.

The latest Malaysian sovereign sukuk however must also be put in proper perspective. This is Malaysia's second only global sovereign sukuk. The first one - the $600 million Malaysia Global Sukuk - was issued way back in 2002 thus precipitating the handful of other sovereign and corporate issuances that followed. The first Malaysia global sukuk was the pioneer debut issue, but it has taken another eight years for a followup issue. Since then the country has led the world in sukuk issuance - whether sovereign global or domestic or corporate issuances.

But, with only Qatar, Bahrain, Pakistan, Brunei and Indonesia the only other sovereigns to issue sukuk to date, the market depth for such issuances is woefully inadequate, which in turn is putting paid to any semblance of the development of a benchmark for such issuances and therefore any secondary trading activity.

Any euphoria about the sukuk market growing at 40 percent per annum should be tempered with the reality that there are far too few issuances and issuers: There is a lack of diversity in structures; tenors and maturities are far too short (on average 3 to 5 years thus inhibiting proper liquidity flow in the market); there are hardly any project finance sukuk; and some differences in Shariah issues remain outstanding, albeit these are more exaggerated than real.

To Malaysia's credit, this latest sukuk issuance was not needed to raise funds, for Malaysia has plenty of liquidity currently. The intention to issue a second sovereign global sukuk was first announced by Prime Minister Najib Tun Abdul Razak at the World Islamic Economic Forum in Kuala Lumpur at the end of May 2010. Against a backdrop of a volatile and challenging market environment, the pricing for the sukuk settled down at US Treasury 5-Year plus 2.128 percent with a yield of 3.928 percent. The underlying asset for the sukuk transaction is a selection of hospitals from a pool of 12 state-owned hospitals.

The investors' roadshow began on May 19 with a launching ceremony in Kuala Lumpur, followed with investors' presentations in major financial centers - Singapore, Hong Kong, Jeddah, Riyadh, Abu Dhabi, Dubai, London and New York - over a space of seven days. Seizing the first window of opportunity in a volatile market environment in the past few weeks, the book opened on May 27 and the deal was completed within a tight window to limit market and execution risk.

Malaysian and other Islamic investors accounted for 18 percent of the issue subscription, the rest of Asia for 21 percent, Europe for 20 percent and the US for 15 percent. This reflected renewed interest by GCC investors in sovereign Malaysian Islamic papers, especially when such activity in the local GCC markets are currently limited due to market and other conditions.

Banks were the main investors with 41 percent of the deal, followed by asset and fund managers at 36 percent, central banks and sovereign wealth funds at 11 percent, insurance and pension funds 6 percent, private banks and corporates at 6 percent.

Initial trading of the sukuk was brisk on Bursa Malaysia, Labuan International Financial Exchange and the Hong Kong Stock Exchange, but the market is forecast to potentially turn lower over the next few weeks. Investors however see the importance of this sukuk beyond the mere liquidity needs of Malaysia and believe that it will better serve as a benchmark issue for both the domestic market and for other regional issuers looking to price as high-grade issuers.