The Khazanah 1.5 billion Singapore-dollar sukuk, which is equivalent to a $1.1 billion issuance, according to the SWF, achieved several milestones, being the largest and longest term sukuk issuance in Singapore; the largest Singapore dollar issuance by a foreign issuer in Singapore and the first Singapore dollar sukuk issuance out of the Malaysia International Islamic Financial Centre (MIFC) initiative. The sukuk is also Khazanah's single largest issuance to-date.

UP to now, the cross-border activity in the Islamic finance space between the two countries was largely confined to the commercial and investment banking sector. For instance, the Securities Commission Malaysia (SC) has given Islamic fund management licenses to Asian Islamic Investment Management Sdn Bhd (AIMAN), a joint venture between Singapore's DBS Asset Management Limited and integrated financial specialist group, Hwang-DBS (Malaysia) Berhad.

In July 2010, the SC also granted a capital markets services license (CMSL) to OSK-UOB Islamic Fund Management Berhad (OSK-UOB IFMB), a 30:70 joint venture between Singapore's UOB Asset Management Ltd. (UOBAM) and OSK-UOB Unit Trust Management Berhad. Singapore banks with registered subsidiaries in Malaysia such as UOB and OCBC have thriving Islamic banking units. In other directions, Malaysian banks such as CIMB Islamic and CIMB-Principal and Maybank have an established presence in Singapore.

Khazanah has other investment portfolios including stakes in the Pantai Hospitals and Parkway Holdings, Singapore, collectively, Asia's leading private healthcare provider. Indeed at the end of July Khazanah was vying with India's Fortis Healthcare for control of Parkway Holdings, in a deal that could cost 3.5 billion Singapore dollars.

The rationale for Khazanah's debut foray into the Islamic capital market in Singapore was articulated by financial regulators straddling the Straits. Zeti Akhtar Aziz, governor of Bank Negara Malaysia and chairman of MIFC executive committee stressed that the Khazanah Singapore-dollar sukuk issuance "is a further step forward for our MIFC initiative to evolve Malaysia into a multi-currency issuance platform for sukuk." The MIFC initiative promotes Malaysia as an Islamic finance global hub.

On the other hand for Ong Chong Tee, deputy managing director of the Monetary Authority of Singapore, "This latest sukuk adds to the growing range of Shariah-compliant financing in Singapore. We welcome regional participants to tap into our growing capital markets and to continue to add to the depth and diversity of markets in the region."

This is mutual respect at the highest level. Gone are the days when Singapore professionals looked down rather chauvinistically on their Malaysian counterparts. Gone are the days when Malaysian professionals showed undue deference to Singapore's pre-eminence as an international financial hub. This reflects the impressive financial structural progress Malaysia has made especially in the aftermath of the Asian financial crisis in 1998 when the Mahathir government was the only one to beat the crisis with a home-grown solution and restructuring to the chagrin of the International Monetary Fund. The Asian financial crisis humbled Singapore and showed that there was a new rising kid on the block, namely Malaysia.

As such in the context of Khazanah's Singapore-dollar sukuk, it remains to be seen whether the Singapore government SWFs such as Tamasek Holdings will return the favor with a sukuk issuance in Malaysian ringgit.

Following Singapore's debut reverse enquiry sukuk in 2008, there has not been much activity in the Islamic capital markets out of the island state. Cognisance of the ambitions of Kuala Lumpur, Seoul, Jakarta and Hong Kong in the Islamic capital market space, sources at the Monetary Authority of Singapore confirm that sovereign Singapore is looking at further issuances in the next year or so to kickstart the Islamic debt market in the island state.

Of course it was the Islamic Development Bank that was the first foreign entity to issue a sukuk through a private placement last year in local currency (200 million Singapore dollar) in Singapore. The IDB had already successfully issued such a local currency sukuk in Malaysia.

Khazanah's Singapore-dollar sukuk could also pave the way for other local currency issuances in the region in such neighboring countries as Thailand, Indonesia, Philippines, and even further afield in Korea and China.

The Khazanah sukuk, issued at nominal value, was successfully priced through an accelerated book building process on 3 August 2010 and at the tightest end of the price guidance at 2.615 percent and 3.725 percent for the 5-year and 10-year sukuk, respectively. This issue through a Malaysian-incorporated special purpose vehicle, Danga Capital Berhad, encompass a 600 million Singapore dollars 5-year sukuk and a 900 million Singapore dollars 10-year sukuk which was launched on an initial offer size of 1 billion Singapore dollars with a "green shoe option" (an option to upsize).

The over-subscription by 4.3 times the book size suggests several possibilities. Khazanah, because of this heavy demand, decided to upsize the transaction from the initial offer size of 1 billion to 1.5 billion Singapore dollars. It also suggested that investors were comfortable with Malaysian sovereign risk (Khazanah is the investment arm of the Malaysian Finance Ministry) and that demand for investments in sukuk is robust, especially in Malaysian and Asian sovereign or quasi-sovereign originations.

The deal attracted a diverse group of 78 local and international investors comprising financial institutions, asset management firms, statutory bodies and insurance companies from Singapore, Malaysia, Hong Kong, Brunei and Europe.

Khazanah's managing director, Azman Mokhtar is confident, "This transaction broadens further our active participation in international Islamic capital markets. The transaction was executed with speed, at a competitive price while the substantial over-subscription was particularly encouraging."

CIMB, DBS and OCBC are the joint bookrunners for this offering. The three are also the joint lead managers together with CIMB Islamic, the Islamic Bank of Asia and OCBC Al-Amin. The co-managers are the Australia and New Zealand Banking Group Limited (ANZ), BNP Paribas, Malayan Banking Berhad and United Overseas Bank Limited.

Khazanah's Islamic bond (sukuk) portfolio, prior to the Singapore-dollar issuance, totaled a massive RM30 billion and in 2009 it took a strategic 25 percent investment stake totaling $150 million in Fajr Capital, a Dubai-based Islamic investment firm, and completed the acquisition of a $76 million acquisition of a 10 percent stake in Jadwa Investment, a leading Shariah-compliant investment company in Saudi Arabia.

The mark-to-market Realizable Asset Value (RAV) of the total overall investment portfolio of Khazanah at end 2009 rose to RM92 billion, recovering from the impact of the financial crisis in 2008 when its value plummeted to RM68.9 billion. Khazanah's 2010 focus, according to the SWF, which is not the most transparent SWF according to the SWF Institute's Transparency Index, is on strengthening its investment portfolio, catalyzing domestic economic growth and the continuation of on-going capacity building work.