Despite being a subdued year for the industry, 2010 witnessed its fair share of innovative and intrepid deals. ISLAMIC FINANCE ASIA honors those deals in this year’s Groundbreakers.
It is evident that the Islamic finance industry is fast becoming more globalized and a lot less insular. Rapid developments in emerging markets, increased governance standards, and regulatory and tax reviews in 2010 were but a few signs of the industry’s increasing maturity. The slew of defaults in 2009 also did not serve to stymie the market, and instead gave rise to advancements in governance standards and incited constructive criticism from industry players and observers. In other words, the market had survived its first major glitch and passed the acid test – albeit somewhat scathed.
According to Kuwait Finance House Research (KFH Research), the Sukuk market saw 16.3% growth in the first half of 2010 to US$16.5 billion, on top of the US$100 billion value of the Sukuk industry as charted in 2009. More than three-quarters of total issuances in the first half of 2010 comprised of sovereign and quasi-sovereign entities, standing at 79.7%, while the power and utilities sector represented 11.5%, followed by the financial services sector at 3.4% on the back of continued infrastructure spending and fund raising activities. Malaysia still headed the Sukuk issuance league table in the first half of 2010, representing 60.5% of total global issuances, followed by Saudi Arabia and Indonesia at 14.1% each. And in terms of currency, ringgit-denominated Sukuk reigned supreme at 53.4%, followed by 10.3% in USD, and 8.3% in Qatar Riyals.
Bursa Malaysia held the lead in terms of Sukuk listings last year comprising US$8.6 billion, or one-third of total global Sukuk issuances in 2010, estimated at US$30 billion. Industry players expect global Sukuk issuances for 2011 to surpass the record high of US$34.2 billion in 2007, with Malaysia expected to trump the issuance table again due to its sound legal and regulatory framework. According to Raja Teh Maimunah, the global head of Islamic markets at Bursa Malaysia, issuers are becoming increasingly willing to list their issues and be subjected to reporting and disclosure requirements to attract investors in the current prudent financial environment.
Emerging from the crisis, industry players anticipate more demand for Sukuk on the back of a growing preference for Shariah compliant products from both Islamic and conventional players, an influx of liquidity from emerging markets seeking Islamic investments, diversification from oil and gas investments in the GCC and continued government efforts to introduce and develop Sukuk instruments and investments.
This year’s Groundbreakers comprise a healthy share of emerging markets with debut issuances from Thailand, Turkey, and Kazakhstan; an unexpected sovereign issuance of substantial size out of Malaysia; increased cross-border activity exhibiting a wider acceptance of Islamic finance across the board; one of the largest project financing deals to date; and a bold shift into the uncharted territory of equity-based financing – all displaying increased interest in the industry, its resilience in weathering the mini-crisis of defaults and all at once proving market dissenters wrong.
It was on these bases that we selected the Groundbreakers of 2010. They are by no means the largest deals in the region, but those that we anticipate will push the industry forward the most. They are the year’s most innovative, speediest and revolutionary, be it in terms of regulation, investments or instruments.
The Islamic Finance Asia Groundbreakers were selected from more than 40 submissions from all over the globe, involving deals that were closed from the start right up to the end of the year in Asia.
With that, congratulations to the winners of 2010, and may 2011 bring more market-driving innovations.
According to the deal’s joint lead managers, Barclays Capital, the transaction represented only the second emerging market sovereign deal with a coupon below 4% over the last five years, after Russia earlier in 2010. The deal, according to Barclays, was key in re-opening the international Sukuk market after almost one year of dormancy. HSBC and CIMB also acted as joint lead managers.
The Sukuk Ijarah, which utilized 12 hospitals as its assets, saw an uptake of 26% by Middle East investors the deal’s intended recipients in a bid to diversify the sovereign’s investor base, open up the market across Asia and jumpstart international Sukuk activity. The deal’s 144A structure was also seen as a boon to the proliferation of similar papers in light of the issuer and its impact on the Islamic financial market as a whole.
The RM600 million (US$190.2 million) Trans Thai Malaysia Sukuk (TTM), a government-linked company issuance, is not only an important cross-border deal in terms of Islamic finance, but also represents growing political ties between the two nations; with the project being equally run by the Petroleum Authority of Thailand (PTT) and Petroliam Nasional (Petronas). Proceeds from the Sukuk will be loaned to TTM (Thailand) to provide funding for the capital costs and working capital requirements for the second phase of the Trans-Thailand-Malaysia natural gas pipeline and separation project (TTM project), which currently provides 17% of Peninsular Malaysia’s natural gas needs and 18% of Thailand’s.
The Sukuk was awarded the highest rating of ‘AAAIS’ with a stable outlook by the Malaysian Rating Corporation (MARC), reflecting the pipeline’s strategic nature to the two national oil companies, while the stable outlook is reflective of MARC’s current assessment of Thai sovereign risk as well as the pipeline’s importance to the Thai economy.
Prasert Bunsumpun, president and CEO of PTT, commented: “The Sukuk offering by TTM is indeed a groundbreaking transaction for us as it is our first Islamic capital market transaction for a company under the PTT. We hope this benchmark Sukuk transaction will act as a catalyst for more Islamic financing by Thai issuers in Thailand and abroad.”
This deal, among the handful of restructuring deals last year, is seen as a market maker in terms of paving the way for future Islamic restructuring deals and their legal intricacies. Another element which caught our eye was the impressive management of the deal’s assets, comprising shares held by Kuwait Finance & Investment Company scattered across nine jurisdictions including Kuwait, Saudi Arabia, UAE, Lebanon, Yemen, Jordan, Qatar, Egypt and the Cayman Islands. The company’s entire debt was collateralized by securitizing the debtor’s assets.
The different facilities involved (KWD and USD) also contributed to further structural complexities, while the nature and volume of the deal’s assets required a rigorous due diligence exercise. Definitely a market maker in our books.
Applied to an acquisition for Singapore dollar assets with earnings in Singapore dollars, the transaction also provided a natural currency hedge to Khazanah. According to investment bankers, the deal was executed seamlessly by both jurisdictions. This demonstrates the capacity of the two key SEN capital market centers to work together, and shows promise for future international corporate finance deals. The deal, comprising both nations’ big league bankers, was arranged by CIMB, DBS, OCBC, UOB (United Overseas Bank), ANZ Bank (Australia and New Zealand Banking) and BNP Paribas.
We expect future issuances of similar stature to arise out of both countries, resulting in a happy marriage between one of the world’s most prolific Islamic deal issuers and a jurisdiction of unrivalled quality in terms of regulations and capital market activity.
The move garnered considerable focus from all quarters, as prior to this Saudi Arabian based Al Rajhi Bank, one of the world’s largest Islamic banking groups, had been a noticeable absentee in the global Islamic debt capital market due to the strict requirements of the bank’s Shariah board. “While our Shariah board respects the views of other Shariah scholars and practitioners, our Shariah board opines that trading of debt or Bai Dayn is prohibited. Therefore, if a Sukuk represents substantial debt receivables, such Sukuk should not be tradable,” elucidated Eqhwan Mokhzanee Muhammad, senior vice president of structured investment, Al Rajhi Bank Malaysia.
Due to the need to reconcile Al Rajhi’s Shariah requirements alongside market expectations and understanding, it was imperative for the underlying transactions of Sukuk ALIm to mimic a bond, while the Sukuk per se was actually an equity instrument and represented actual ownership of assets. This was to minimize any sort of contention on the structure from a Shariah standpoint, allowing the Sukuk to work in the vein of an equity investment or unit trust instrument, and breaking away from the usual asset-based and asset-backed structures.
The underlying assets of Sukuk ALIm were represented by tangible assets such as real estate properties and financial assets such as receivables, with tangible assets making up the majority of the total assets of the Sukuk. According to Eqhwan, despite the issuance precluding elements of Inah, Bai Dayn, Tawarruq, Munazzam and Waad, the Sukuk still maintained its parity with traditional Sukuk structures in terms of behaviour, characteristics and risk profile.
As part of its resource mobilization plan, the Islamic Development Bank (IDB) issued its latest Sukuk under their upsized US$3.5 billion medium-term notes or trust certificate issuance program. The Sukuk itself offers a five-year tenor with a return of 1.755%, to be paid semi-annually, 40 basis points above the benchmark mid-rate swap. Listed on the London Stock Exchange and Bursa Malaysia under its exempt regime, IDB’s Sukuk offering, like the previous ones, will also be issued through the Jersey registered special purpose vehicle Trust Services. Unlike previous issues under the program, this latest issue was a deal registered and approved under the Islamic securities guidelines issued by the Securities Commission Malaysia – on top of being a Regulation S issue; making it the first “Emas Sukuk” issued by a supranational.
IDB in the past did not go to the debt capital market for resource mobilization because there was simply no compelling need. Due to ample resources and liquidity, IDB was not in any hurry to tap the open market; but to ensure long term sustainability and broader access to liquidity, it decided to issue Sukuk.
IDB also sees its increasing presence in the debt capital market via Sukuk as part of its mandate to promote the development of the Islamic financial sector and products. As an institution owned by member countries, that wants to develop Islamic finance, Sukuk issued by IDB goes a long way in assisting its member countries to build their capacity and capability in accessing the financial market.
The deal not only marks a huge breakthrough for emerging market Kazakhstan, but is also the first Islamic Structured Export Financing deal in Central Asia. True to the structure of Islamic trade finance, the deal exhibited a genuine cooperation between the financier and beneficiary, and showcased the ITFC’s ability to successfully integrate an Islamic financing structure into Kazakhstan’s secular system.
Arranged by Kuwait Finance House Malaysia and advised by White & Case, Mori Hamada and Clifford Chance, this deal is expected to elevate Japan out of its Islamic issuance rut and create more demand for similar products in the country, especially in line with its recent announcement to afford foreign investors tax breaks on foreign Shariah bond dividends.
The deal also exhibited seamless cross-border activity, and efficiency among its arrangers and legal counsels; spanning the jurisdictions of Malaysia, the Middle East, and of course, Japan.
The deal’s arrangers, Citibank and Liquidity Management House, as well as legal counsel Norton Rose and Hogan Lovells, were successful in overcoming regulatory hurdles, including the contradictions between Turkish law and English law, as well as tax barriers.
The issuance, set at US$8.5 billion, consisted of direct conventional facilities in both US Dollars and Saudi Riyals and two Islamic structures; an Istisnah-Ijarah, and a Wakalah-Ijarah structure amounting to US$1.4 billion – one of the largest amounts for a project finance deal to date.
Apart from its issuance size, what made this deal spectacular was its ability to raise one of the highest volumes of funding for a limited recourse project financing in choppy market conditions – especially after the double blow experienced by the Kingdom of Saudi Arabia with its high profile defaults by the Saad and Al Gosaibi groups in 2009.
The deal’s 16-year tenor is also a first for project financing deals in the market, previously confined to seven to ten year issuances, demonstrating market confidence in the project and its structure. True to the concept of Islamic finance, the market could definitely benefit from more Islamic project financing deals.
This article was published in the February 2011 issue of Islamic Finance Asia