As Malaysia prepares to launch its second benchmark dollar-denominated global Sukuk amid fears of an unreceptive marketplace. SCOTT WEBER looks at the intricacies of the offering and what it will mean for the global Sukuk market.
According to the preliminary offering circular obtained by Islamic Finance Asia, the listing, on the 3rd May under the government’s special purpose vehicle, 1Malaysia Global Sukuk, will be Malaysia’s first foray into the global Sukuk market since its groundbreaking benchmark global Sukuk in 2002.
Whilst the total size of the deal had yet to be announced at the time of print, the figure is expected to exceed the previous issuance of US$600 million. Several figures have been mooted but a realistic target figure of at least US$1 billion to US$1.5 billion is expected, with unconfirmed reports suggesting the figure could reach US$3 billion given favorable investor response.
Speaking at the launch, Malaysian prime minister Najib Razak said the global Sukuk will set a new pricing benchmark not only for future Sukuk issuances but also set the standard for conventional bond issuances in the country, with the government well positioned to prudently extend its debt exposure due to its proactive debt management strategies.
Strong external position
Launched with the sole purpose of raising the profile of Islamic finance and capitalizing on the traction gained against conventional markets, the 1Malaysia Sukuk is expected to serve as a viable alternative source of funding for all investors in the wake of the debt crisis in Europe and the UAE. As a result, Malaysia is seeking to tap into the international debt market as the government seeks to increase development spending in order to facilitate economic growth, capitalizing on recently-published figures indicating that Malaysia has exited the recession strongly, posting better than expected first quarter growth of 5.5%.
The prime minister said the government remains on track to cut its fiscal deficit to below 5.6% in 2010 as Malaysia’s export-oriented economy continues to grow strongly. Najib added that the government’s external debt currently stands at only 2% of GDP.
The finance ministry said the launch will strengthen the government’s commitment to contribute to the development of the Sukuk market and stamp Malaysia’s mark globally as the leading international Islamic financial hub for Sukuk origination, having already seized a 49.4% market share in the year to April 2010.
Issue focus
While the Sukuk’s five-year maturing Ijarah structure’s tenor is less than expected from a sovereign issuer, it does however reflect the current trend for such issuances and thus guarantees that a relevant short-term benchmark will be established.
Of greatest significance, however, is the Sukuk’s 144A status, leading on from last month’s cover article in Islamic Finance Asia, alluding to why there was a lack of 144A Sukuk in the market. The 1Malaysia global Sukuk will become the 6th such issuance brought to market with its 144A status helping to resolve any shortfalls in the volatile market and effectively guaranteeing deeper liquidity, competitive pricing and greater trading volume, as well as boosting the secondary trading marketplace. Based on the Ijarah structure, the Sukuk will pay returns with rental income generated from the sale and the leaseback of the 12 state-run hospitals that serve as the Sukuk’s underlying assets.
The mandated joint lead managers and bookrunners for the issuance are Barclays Bank, CIMB Bank and HSBC, with The BNY Mellon serving as trustee for the special purpose vehicle 1Malaysia Global Sukuk in America. Allen & Overy, Clifford Chance and Zaid Ibrahim & Co are serving as legal counsel to their retrospective geographical areas of strength.
A point to highlight is the lack of Islamic banks involved within this deal, especially with Malaysia’s strong support of the domestic Islamic finance Industry. According to a source familiar with the deal, this is due to the current underperformance of Islamic banks and that the selection criteria were purely based on merit and current performance in the market. This is also indicative of the target audience of conventional investors with Barclays, CIMB and HSBC chosen specifically because of their strong conventional distribution networks.
Eye of the storm
Considerable concern has been given to the possibility that the Sukuk will be issued in the middle of a rising trend of higher yields among sovereign borrowing as a result of the European debt crisis and thus could establish a damaging high benchmark yield across the industry, as yields on bonds in Greece, Portugal and Spain have surged as they struggle to meet their debt obligations.
Industry players and government are worried about the timing of the deal and were hoping to wait until the Greek situation had come to a resolution. The Sukuk is subject to market conditions and as such could face delays in order to maximize investor uptake and favourable amrket conditions. However, those familiar with the deal have stated that the Sukuk would not have been brought to the market had sufficient support not been identified.
The latest sovereign issue will provide a new benchmark for pricing bonds in Malaysia as the only other outstanding global note issue is set to mature next year. However, when there’s a drop in confidence in the traditional market, like in Europe, people look for diversification and therefore Islamic bonds can always attract a better reception, according to Nazir Razak, CEO of CIMB Group Holdings.
Despite prevailing uncertainties in global markets, Malaysia is proceeding with the Sukuk offering because of the scarcity value attached to such bonds, Rarity is definitely a major selling point of such issuances. Barclays Capital managing director and country head Steven R Clayton added that the sale is expected to attract strong investor interest, bolstered by an exodus of investors from the traditional European debt markets seeking alternative investments in emerging markets.
Benchmark pricing
The certificates are due to be listed on the stock exchanges of Hong Kong, Labuan and Malaysia. With the Sukuk assigned a rating of ‘A-’ from Standard & Poor’s and ‘A3’ by Moody’s Investors Service, the rating on the proposed trust certificates of the issuer, 1Malaysia Sukuk Global, reflects the strength of the transaction documentation, including the lease and purchase undertakings. The sovereign is obligated to make good on all payments needed to ensure that the issuer has sufficient funds to pay the certificate holders.
Standard and Poor’s decision to rate this proposed issue on par with the sovereign’s commercial financial obligations takes into account representations of the government that all payments rank pari passu with the senior unsecured debt obligations of Malaysia. These representations are further substantiated by a cross-default clause on all material external debt obligations of the sovereign.
The sovereign credit ratings on Malaysia are supported by strong external liquidity, net external creditor position and a diversified and increasingly competitive economy. The ratings are constrained by sustained fiscal deficits, increasing general government net debt levels and a moderately high level of contingent liabilities.