Noriba Bank has structured some very interesting transactions, including real estate investments in Europe and corporate Sukuk issued by the Malaysian state of Sarawak and the Sarawak Economic Development Corporation (SEDC). Noriba Bank’s deputy chief executive officer Ikbal Daredia shares with Islamic Finance news the success story of the Sarawak Sukuk.
Incorporated by the Bahrain Monetary Agency (BMA) in 2002, Noriba Bank has since scored noticeable successes from Islamic fund management, the European real estate market and the Malaysian Sukuk sector.
In October 2004, Noriba and UBS Investment Bank were awarded a mandate to joint lead manage a US$350 million, five-year Sukuk issued by Sarawak Corporate Sukuk Inc. on behalf of the SEDC, a statutory body created to promote the commercial and industrial development of the eastern Malaysian state of Sarawak. The funds will be used to refinance earlier loans of the SEDC and its semiconductor manufacturing subsidiary, 1st Silicon Malaysia.
This Sukuk is the first rated international corporate Sukuk issue and has received investment grade ratings of A- by Standard & Poor’s (S&P) and Baa3 by Moody’s, which cited the structural and legal integrity of the transaction. The order book was three and a half times oversubscribed, with over US$1.2 billion of demand generated. Priced at par, the bonds have a coupon of six-month Libor plus 110 basis points.
When sharing this success story, Daredia stressed that bringing a new Sukuk to market was not easy and is a long, hard process. “We were faced with a unique set of issues while attempting to resurrect the stalled transaction,” he explained, noting that one of the issues related to the debut issuer. He said investors were quite skeptical of the issuers as Sarawak and SEDC were unknown to the market, but a Noriba credit research report and a focused roadshow provided investors with a better understanding of the issuers.
Daredia added that the rating advisory issue was solved when UBS ratings demonstrated to S&P the strong fiscal position and resilience of Sarawak and achieved a double ratings upgrade.
According to Daredia, UBS made exhaustive efforts to locate bondholders and succeeded in identifying sufficient to obtain quorum and to vote in favor of the motion to pre-pay. Four attempts had earlier been made to obtain the consent of the existing bondholders and on each occasion they had failed to achieve a quorum.
Another challenge put forward, he highlighted, was that the transaction required three legal jurisdictions including the Islamic opinions, two listings and three issuing parties. However, the UBS/Noriba deal team worked ceaselessly to create the legal framework within which the issue could be closed. Allen & Overy Singapore had been appointed as legal advisor.
In terms of cost saving, he pointed out that the Sukuk issuance had allowed SEDC to save 1.65% annually in financing costs.
The Sarawak Sukuk, or trust certificates, will mature by 2009 and are listed on Luxembourg Stock Exchange as well as Labuan International Financial Exchange.
Daredia strongly believes that Sukuk is gradually edging out the old interest-bearing conventional bonds, at least in the Islamic world. In this regard, he said, the underlying phenomenon has been two-pronged, namely the urge to attempt an Islamic way of funding projects, and the string of successful endeavors in the last 4–5 years to fund large development projects in a Shariah compliant manner.
He noted that the innovative investment instrument had not only won the hearts of governments in Islamic countries, but had also seen large corporations adopting Sukuk in order to meet their financial objectives.
Another aspect worth mentioning, he pointed out, was that whilst the Malaysian Sukuk was based on the Islamic structure of Ijarah (where the customer selects the assets to be financed by a bank and the bank then purchases those assets and leases them to the customer for an agreed period), the BMA offered government bills that were structured in the form of three-month paper, referred as Salam securities.
“This portrays the depth and diversity of the Islamic finance field in general and of the Sukuk instrument in particular,” he said.
On the relationship with Malaysia, Daredia acknowledged that UBS has had a long and uninterrupted association with the country’s capital markets and was one of the country’s most active brokers. The Switzerland-based UBS was one of the first foreign brokers to start trading on Bursa Malaysia when the Securities Commission awarded foreign broker licenses in September 2005, and its research coverage was one of the most comprehensive of all foreign brokers.
UBS has lead managed numerous groundbreaking equity, debt and mergers and acquisitions transactions in Malaysia in recent years. These include: IPOs from Bursa Malaysia and Astro; convertible bonds from IOI Corp and YTL Power; the first quasi-sovereign international Sukuk for Sarawak; Telekom Malaysia’s bond and sell-down in Telkom South Africa; and Telekom/Khazanah’s acquisition of a 24% stake in Singapore’s MobileOne.
“We have been very committed since our first opening in 1989. Indeed, UBS is one of the global investment banks not to have withdrawn from any of the region’s equity markets as a result of the financial crisis,” he concluded.