Regulatory Deal of the Year
Bank Kerjasama Rakyat Malaysia (Bank Rakyat), Malaysia’s biggest Islamic cooperative bank, has via an orphan-based SPV, Mumtaz Rakyat Sukuk (the Issuer), established a subordinated Sukuk Murabahah program of up to RM5 billion (US$1.12 billion) in nominal value (the Subordinated Sukuk Program) with a tenor of up to 20 years.
The Subordinated Sukuk Program is significant in the local capital market as it constitutes Bank Rakyat’s first Tier 2 Islamic debt program and the first ever Basel III-compliant Islamic debt program by a development financial institution (DFI) in Malaysia.
The Subordinated Sukuk Program was structured according to the Shariah principle of Murabahah (via a Tawarruq arrangement), and is Bank Rakyat’s third (and by far, largest) venture into the Islamic debt market, previously entering the market via its senior debt programs in 2012 and 2014 through funding conduits Imtiaz Sukuk and Imtiaz Sukuk II respectively for up to RM10 million (US$2.24 million) in nominal value cumulatively.
As the Issuer was an Islamic cooperative bank established under the Malaysian Cooperative Societies Act 1993, the deal team from Adnan, Sundra & Low (ASL), led by partner Edward Ng, was responsible to advise on and address legal issues arising from:
(i) the capacity of cooperative financial institutions and multiple approvals required from the Ministry of Domestic Trade, Cooperatives and Consumerism, the Malaysian Cooperative Societies Commission and the Ministry of Finance which were in addition to the typical Bank Negara Malaysia approval for bank regulatory capital issuances, and (ii) statutes such as the Islamic Financial Services Act 2013, the Co-operative Societies Act 1993, the Co-operative Societies Regulations 2010 and the Bank Kerjasama Rakyat Malaysia Act 1978.
Further to the aforementioned aspects, the establishment of the Subordinated Sukuk Program is in line with Bank Rakyat’s strategy to comply with more stringent rules on capital requirements, and it is in compliance with Basel III which requires stronger risk management measures from banks in comparison with the previous installments of the Basel Accords, in order to increase bank liquidity and reduce leverage.
As the prevailing capital adequacy requirements for DFIs were not yet at Basel III standards, the Subordinated Sukuk Program was structured to be in accordance with the requirements of the Capital Adequacy Framework for Islamic Banks (Capital Components) issued by Bank Negara Malaysia (CAFIB). In this regard, ASL’s deal team was additionally tasked with advising on a broad range of issues of compliance with Basel III in respect of Bank Rakyat’s prevailing capital adequacy requirements.
Accordingly, the Subordinated Sukuk Program was structured to incorporate inter-alia the requisite loss absorption feature whereby pursuant to the provisions of CAFIB, the Sukuk may, at the option of Bank Negara Malaysia, be written off upon the occurrence of a non-viability event in relation to the Issuer and/or Bank Rakyat.
The proceeds from the issuance of the subordinated Sukuk Murabahah under the Subordinated Sukuk Program will be used by Bank Rakyat for its Shariah compliant business expansion program, general banking, working capital and general corporate purposes. The program itself has been assigned a long-term rating of ‘AA3(s)’, by RAM Rating Services, and on the 20th June 2016, the Issuer successfully issued the first tranche of the subordinated Sukuk Murabahah, utilizing plastic resin as the underlying commodity.
The principal advisor and lead arranger of the Subordinated Sukuk Program was Maybank Investment Bank, while the joint lead managers were AmInvestment Bank and Maybank Investment Bank.
The issuance pioneers the way for regulatory capital issuances by other DFIs which will further consolidate Malaysia’s position as the leader in international Islamic finance. Accordingly, and as transaction solicitors, ASL is grateful to the transaction parties for the opportunity and privilege of advising on this landmark transaction..
This case study was written by Priya Sirisena, a senior legal assistant at Adnan, Sundra & Low. She can be contacted at [email protected].