LONDON, 30 October 2006 - The drive toward innovation in the burgeoning global Sukuk (Islamic bond) market is gathering momentum with the closing recently of the world's first exchangeable and effectively equity-linked Sukuk - the $750 million Islamic Exchangeable Trust Certificates issued in October 2006 by Khazanah Nasional Berhad, the wholly-owned investment subsidiary of the Malaysian Finance Ministry, and jointly arranged by CIMB of Malaysia; HSBC Amanah and UBS Investment Bank.
This follows another recent securitization involving the first Sukuk with both a call and put option - the $150 million Musharaka Trust Sukuk issued by Kuwait's The Investment Dar lead managed by Bahrain-based Unicorn Investment Bank and WestLB in the UK.
Bankers such as Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank, and David Testa, head of asset securitization at WestLB's London branch, talk about cutting edge innovation in both the structures and Shariah applications.
Kevin Wong, managing partner of City-based international law firm's Singapore office, who acted for the three lead managers in the Khazanah transaction, stresses that "this was an innovative deal which demonstrates the ongoing development and sophisticated nature of Islamic finance. Khazanah has set a new benchmark for both global Islamic investors and conventional equity-linked investors in a single, cutting-edge transaction."
The globalization of the Sukuk is another important emerging feature of the market - not only in terms of the structurers and the legal firms involved, but also from the point of view of the geographic distribution of investors and the structures themselves.
The Khazanah Sukuk, for instance, attracted a third of the subscriptions from the Middle East, mainly the Gulf Cooperation Council (GCC) region. This, despite the fact that GCC investors are not familiar with exchangeable instruments, including bonds. True, the issue was virtually guaranteed by the Malaysian government, because the Sukuk had recourse to the Obligor, Khazanah, but for the nascent global Islamic capital markets industry it is both encouraging and important to see a much greater level of cross-border interaction between the Middle East and South East Asia.
CIMB stresses that the $750 million Khazanah periodic payment exchangeable trust certificates "is the world's first Shariah-compliant exchangeable bond" and the largest exchangeable instrument issued out of Asia ex-Japan to date in 2006.
It is also the largest exchangeable bond out of Malaysia, surpassing Khazanah's own $414.5 million exchangeable bond into PLUS Expressway Berhad. The issuance is linked to the exchange of trust certificates for shares in Telekom Malaysia Berhad (TM) owned by Khazanah and held in trust.
The trust certificates were issued by Rafflesia Capital Ltd., a Labuan special purpose vehicle (SPV) with recourse to Khazanah Nasional Berhad.
Rafflesia's shares are held by an independent trustee for the benefit of certain charities.
The $750 million 5-year benchmark offering issued on Oct. 4, 2006 matures in October 2011. However the trust certificates are exchangeable into ordinary shares of RM1 each of TM listed on Bursa Malaysia. According to CIMB, the size of the Sukuk was increased from an initial $500 million to $750 million due to "strong interest from an excellent mix of investors."
The underlying share, Telekom Malaysia Berhad, the national telecommunications utility, used in the exchange for the trust certificates, is deemed as a Shariah-compliant counter thus meeting the specific activity and financial ratios criteria, set by the Shariah Board of CIMB and endorsed by Malaysia's National Shariah Council.
Khazanah owns a 40 percent stake in Telekom Malaysia, of which some 7 percent has been set aside for this transaction.
The certificates represent interests in a trust constituted by the issuer and are exchangeable into shares of Telekom Malaysia Berhad.
This trust company is Orchid Capital Limited, a Labuan SPV, which will hold Khazanah's shares in Telekom Malaysia and through which the exchange will occur. Proceeds from the Sukuk are for general corporate and additional working capital purposes of Khazanah's principal business activities, and were also used to purchase the beneficial interest in Telekom Malaysia shares from Orchid Capital, which in turn used the proceeds to pay Khazanah for the purchase of the beneficial interest in Telekom Malaysia shares.
This is the first Sukuk issue which incorporates the full convertibility features usually seen in conventional equity-linked transactions. However, the Khazanah transaction is not a convertible bond but an exchangeable bond.
The Sukuk pays an annual coupon/periodic payment of 1.25 percent per annum, with a yield to maturity of 5.07 percent per annum (equivalent to US 5-year mid swap over 3 basis points), and an exchange premium of 19 percent over the 1-day volume weighted average price of Telekom Malaysia Berhad shares on Sept. 27, 2006.
The annual coupon payment comes solely from dividend income from the designated Telekom Malaysia Berhad shares. The initial exchange price of the shares is RM10.85 per share (based on a fixed exchange rate); and the initial reference share price is RM9.1143 (1-day volume-weighted average price at Sept. 27, 2006). Another feature of the Sukuk is a call option which can be exercised by the Issuer at the end of year 3 (Oct. 5, 2009). According to CIMB, the Sukuk was marketed through bookbuilding, with the order book opened on Sept. 21, 2006 and closed on Sept. 27, 2006. At closing, the order book was oversubscribed by 6 times.
Demand was generated from 'quality investors' from the Middle East, Europe and Asia, and included financial institutions, asset managers, insurance companies, pension funds, corporates and high net worth individuals.
The Sukuk is listed on the Labuan International Financial Exchange (LIFX) and on the Hong Kong Stock Exchange, the first Sukuk to be listed on the latter exchange.
