Last year was nothing short of an acid test for the Islamic markets. After being heralded as the savior to the drubbing taken by conventional markets, Islamic finance took some blows itself with a number of high profile defaults. Despite this, NAZNEEN HALIM and the ISLAMIC FINANCE ASIA team unearthed some brave issuances and gems, which have translated to our Groundbreakers of the year.
Nakheel, East Cameron, Investment Dar and all those in the same boat really had it coming. It was only a matter of time before they were found out, and their over-ambitious over-leveraging would get the better of them. Honestly. So in one breath, we put the worst behind us, took what we must from it, and watched the Islamic markets evolve yet again.
The Sukuk market saw a leap in investor confidence towards the end of 2009, with data from Dealogic charting US$17.3 billion in Sukuk sold up to November. Islamic banking assets also saw a rise by 28.6% to US$822 billion in 2009, compared to a mere 6.8% growth on the conventional side, with many predicting 2010 to be a more interesting year with a healthy issuance pipeline originating from less traditional sources.
Last year, we saw more innovative structures, diversified investments and a stronger adherence to the principles of Islamic finance, signalling confidence in the Islamic capital markets and more educated investors. These deals also breached unfamiliar terrain, crossing over into multinational jurisdictions — including China and the US — and involved Turkish banks and innovative structures such as island leasing. All these were closed before year-end, amid the barely resuscitated economy and flailing investment giants.
It was on these bases that we selected the Groundbreakers of 2009. 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 they in terms of regulation, investments or instruments.
The 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. These deals also illustrate strong communication across the board among Islamic banks, with the deals’ lead arrangers comprising a myriad of banks from Asia and beyond. Conventional banking giants such as Goldman Sachs, Citibank, Barclays and Morgan Stanley were also all in on the year’s deals.
|Republic of Indonesia Global Sukuk
We chose the Republic of Indonesia’s US$650 million foreign currency Sukuk Ijarah as one of our 10 groundbreaking deals of 2009 for a gamut of reasons, the first being that it was the sovereign’s first US dollar-denominated Islamic bond to successfully close despite being issued at the height of economic uncertainty in April last year.The sovereign, through this issuance, proved that Indonesia is a force to be reckoned with, in terms of attracting investments globally and Islamic money, and instantly sealed the sovereign’s spot as a viable contender in the race for Islamic investors, affirmed by the overwhelming investor demand of 7.3 times at US$4.76 billion. The deal was also unique in the fact that it was open to both Islamic and conventional investors, proving that conventional markets are also hungry for diversified investments. The sovereign’s foreign currency offering was also the first US dollar-denominated Sukuk in Asia since 2007, and the largest issuance outside the GCC at the time. Set to mature on the 23rd April 2014, the bonds also offer an attractive fixed rate yield at 8.8% a year — one of the highest at a time when rates in developed economies were at a historic low.
Disaggregated by region of origin, investors were represented by buyers from the Middle East and nations governed by Shariah law (30%), Indonesia (8%), other Asian countries (32%), Europe (11%) and the US (19%). About 45% of the Sukuk’s investors were funds, 37% banks, a further 14% consisted of retail investors and 4% were insurance companies and pension funds. “The Indonesian government deserves praise for its initiatives and determination to develop the industry. Locally, this successful issuance would encourage local corporates which need to raise funding to consider Sukuk as a funding instrument. This sovereign issue has increased interest in Sukuk as an investment alternative for financial institutions, mutual and pension funds, among others,” commented Gahet Ascobat, Islamic finance head at HSBC Amanah Syariah in Indonesia. The deal was lead arranged by Barclays, HSBC Holdings and Standard Chartered.
|Tourism Development & Investment Company Abu Dhabi
The Tourism Development & Investment Company’s (TDIC) US$1 billion Sukuk Ijarah was a standout deal compared to the other submissions we received for the sheer fact that it was one of the most innovative deals to emerge from last year, with the leasing of a portion of Abu Dhabi’s Saadiyat Island for development. In essence, it encompassed two very contemporary aspects of Islamic finance via the issuance of a Sukuk Ijarah and project financing in the latter part.The deal had also managed to break free from the “curse” of defaults which were occurring at the same time in the GCC. According to a banker close to the deal, the issuance was basically sold on the back of its ratings — AA by all three agencies (Moody’s, Standard & Poor’s and Fitch Ratings — something which did not occur with a majority of the defaulters in 2009. The deal also saw the largest global Sukuk order book in 2009.
The US$1 billion Sukuk issuance, which is part of TDIC’s US$1.45 billion Global Sukuk Trust Certificate Issuance Program, was sold under a Sukuk Ijarah structure and holds a five-year tenure. The deal’s lead managers and bookrunners comprised Standard Chartered, Abu Dhabi Commercial Bank and HSBC, while Abu Dhabi Islamic Bank, Dubai Islamic Bank, First Energy Bank, Islamic Development Bank and Qatar Islamic Bank acted as co-managers. Allied Investment Partners acted as general financial advisor to TDIC, while Maples and Calder, Clifford Chance and Linklaters acted as legal advisors to the deal.
The massive issuance by TDIC also affirmed the popularity of the Sukuk Ijarah structures among issuers, which is perhaps not a bad thing, seeing that it is now one of the less controversial structures from a Shariah perspective due to its straightforward nature.
|General Electric Sukuk
Dubbed one of the most anticipated and groundbreaking Sukuk of the year, the deal speaks for itself. Involving high profile issuers and arrangers as well as an impressive list of legal counsel, the US$500 million General Electric (GE) Sukuk Ijarah served as a great introduction for corporate America into Islamic finance waters.Bridging the gap between the US, Asia and the Middle East, this deal’s arrangers and bookrunners included Bank Islam Brunei Darussalam, Citigroup, Goldman Sachs, Kuwait-based Liquidity Management House and the National Bank of Abu Dhabi; and was counselled by Clifford Chance, Allen & Overy and Conyers Dill & Pearman. The Sukuk was also awarded a AA+ rating by Standard & Poor’s and Aa2 by Moody’s, based on its issuer’s ratings.
The Sukuk Ijarah which utilized GE’s existing aircraft assets also included a Commodity Murabahah element to ensure that all proceeds from the issuance were gained and invested Islamically from start to finish.
This transaction marks many firsts, including the first investment grade Sukuk for a US corporate, and was intricately structured to accommodate US tax implications.
|Petronas Trust Certificates
National oil and gas firm Petroliam Nasional, better known as Petronas, is undoubtedly Malaysia’s favorite son in every possible aspect. And when Petronas issues a bond, we know it’s the real deal — and most likely foolproof. Petronas’ groundbreaking offering consisted of US$3 billion senior unsecured 10-year notes and US$1.5 billion in five-year Sukuk Ijarah Trust Certificates.The issuance was announced on the 28th July, and by the next day the government-linked company had received an order book of US$1.8 billion — an impressive amount in less than 24 hours. The deal had received a total orderbook of US$19 billion by its closing, from which US$4.5 billion was chosen to make up the conventional and Islamic aspects of the bond. Investors from all over, such as Singapore, Hong Kong, London, Dubai, Abu Dhabi, Los Angeles, New York, San Francisco and Boston had all expressed interest in the bonds.
Most of the Asian issuances at the time of the Petronas trust certificate issuance had originated from Korea, thus also inadvertently increasing diversity in the markets. The Sukuk is also the first Emas Dollar bonds to be accorded by Bank Negara Malaysia, and one of the first to be listed on Bursa Malaysia under its newly exempt regime. It is also the first foreign currency denominated Sukuk in Malaysia to be issued under the Malaysian International Islamic Financial Center initiative.
“This was a challenging transaction which involved managing two tranches, with one governed by English law and Shariah requirements and the other governed by New York law. There were also some very complicated issues and it was completed within a very aggressive timeline,” said Naomi Ishikawa, partner at Milbank, Tweed, Hadley & McCloy in Singapore, one of the deal’s lawyers.
Morgan Stanley, CIMB, Citi and Morgan Stanley acted as the deal’s bookrunners, while the deal’s advisors comprised law firms Milbank, Tweed, Hadly & McCloy; Cleary Gottlieb Steen & Hamilton; Kadir Andri & Partners; ZUL RAFIQUE & partners; and Lovells.
|Sunway Platinum Success Musharakah
This particular deal caught our attention right off the bat due to its innovation in home financing, which was translated into a bigger scale. Proceeds from this RM132 million (US$38.56 million) deal were used to refinance the issuer’s existing term loans taken up to part-finance the construction of Monash University’s Malaysian campus.The deal, which was arranged by Maybank Islamic and counselled by Albar & Partners, utilized the Musharakah Mutanaqisah structure which is typically used for individual home financing.
We deemed this transaction groundbreaking due to the fact that it broke the traditional boundaries of a typical Musharakah Mutanaqisah partnership and did not utilize cash on the issuer’s side for the refinancing, instead playing on the issuer’s ownership of the existing property.
The deal’s closure was also subject to stringent timelines in order to enable the issuer to complete its repayment of existing term loans by the due date.
|Islamic Development Bank Singapore Dollar Sukuk
Singapore has been teasing Islamic investors with its vows to play catch up to its neighbors Malaysia and Indonesia. However, let’s be honest, nothing much has emerged from the island state in the past few years to place itself among the big boys.However, in 2009, with a little help from Standard Charterd Bank, IDB Trust Services and Clifford Chance, the Islamic Development Bank issued its first ever Singapore-dollar denominated Sukuk at US$142.32 million.
This AAA-rated issuance not only affirmed the Monetary Authority of Singapore’s commitment to the growth of Islamic finance, but also allowed issuer Islamic Development Bank achieve its objective of diversifying its investor base and promoting Islamic finance to non-member countries.
|Angels Murabahah Facility
This deal reminded us of the importance of the sometimes overlooked element of true sale in Islamic finance. Angels Products, an Indonesian-based issuer, received US$25 million in financing from the International Islamic Trade Finance Corporation for the purchase of raw sugar to be stored and processed for industrial use.Despite being a relatively small amount compared to the billions of dollars worth of issuances last year, this deal embodied the true sale concept of Islam, where the financier is directly involved in the sale and purchase of the commodity to the client. It is also Indonesia’s first Murabahah trade finance deal.
|Kuveyt Turk Sukuk Murabahah
Secular Turkey has been relatively covert with its Islamic finance operations, having popularized the term “participation banks” over the past few years to avoid legal entanglements. However, last year Kuveyt Turk Katilm Bankasi, one of a handful of participation banks, issued a US$115 million Commodity Murabahah syndication along with Liquidity Management House for Investments, with law firm Clifford Chance as the deal’s advisor.The deal — due to its novelty in being Turkey’s first full-fledged Islamic deal of 2009, thus exposing investors to a whole new market — had enticed market participants from all over, including Europe and Kuwait. Investors included Turkiye Halkbank, Islamic Development Bank, Citibank, GarantiBank International, Gatehouse Bank, National Bank of Kuwait and Standard Chartered Bank.
The deal was also one of the first “new money” deals to originate from Turkey after the credit crunch, signaling investor confidence in this emerging market as well as Islamic finance.
Malaysian telecommunication giant Maxis issued an initial public offering for up to 2.25 billion shares in November last year, comprising 30% of the company’s paid-up share capital.The IPO underscored the strength and depth of the Malaysian capital market with its US$3.3 billion offering, making it the largest IPO in Malaysia to date and the largest Islamic IPO in Southeast Asia.
Maxis’ institutional book-building exercise closed at 3.7 times its initial offering and attracted the big boys in the global investment community, thus bringing back foreign funds that had previously left the Malaysian market.
Rabigh, part of the Saudi Electric Company’s International Power Plant (IPP) project, closed its US$1.9 million project financing facility last year, attracting participation from previously unheard of names in the Islamic financing community such as the Bank of China. Islamic banking veterans who were part of the deal’s consortium of financiers included Al Rajhi Bank, Alinma Bank, Calyon, HSBC, National Commercial Bank, Banque Saudi Fransi, Samba Financial Group and Standard Chartered Bank.The deal, which was structured by Al Rajhi Bank, involved a unique Shariah-based lease product dubbed Ijarah Mawsufa Fi Al Dhimmah, or forward Ijarah, which helped abate risk on the lender’s side and conformed to the fundamentals of risk-reward sharing in Islamic finance. Which, let’s admit, is a novelty in times when people are particularly prudent and unwilling to bear any sort of risk before reaping the rewards.