The $398.8 million raised by Khazanah Nasional via Labuan SPV is exchangeable into Khazanah’s holding of ordinary shares in Beijing Enterprises Water Group.
The issuance represents the first Sukuk to offer exposure into China’s growing water utility sector and is the highest exchange premium achieved for an exchangeable Sukuk by Khazanah.
The exchangeable Sukuk was priced through an accelerated book-building process and achieved a final pricing of 43.0% exchange premium with zero periodic payment and 0.00% yield to maturity.
The transaction achieved the highest exchange premium for a zero coupon and zero yield exchangeable Sukuk since 2007 in Asia Pacific ex-Japan. The Sukuk, which has a tenor of 5 years with an investor put option at the end of year 3, drew demand from a diverse group of investors comprising long only funds, hedge funds, arbitrage funds as well as asset managers across Asia and Europe.
The exchangeable Sukuk, structured based on the principle of Wakala, is a novel Islamic finance solution whereby it references a stock in the water utility sector that does not meet the financial ratio requirements for Shariah-compliance set by the Dow Jones Islamic Market™ Index and FTSE Shariah Global Equity Index Series.
The structure also provides the Sukuk holder the option to request for Khazanah to settle the exchange right by delivering BEWG shares in lieu of cash, subject to the terms and conditions of the Sukuk.
Sukuk Details
Bank of America Merrill Lynch, CIMB and Deutsche Bank are the Joint Bookrunners and Joint Lead Managers for this exchangeable Sukuk transaction.
Full details of the sukuk can be found in the Sukuk.com Sukuk Profiles section here.
The Ministry of Finance of the Government of Pakistan intends to issue a Sovereign Sukuk and has issued a request for expression of interest for the appointment of a lead manager. The proposed Sukuk will be issued in US Dollars for a value of between $500 million to $1 billion.
Interested parties are invited to submit proposals to the Assistant Economic Advisor (EF C-III), at Room 229, Q Block, Finance Division, Pak Secretariat, Islamabad, Pakistan. Phone: +92 51 9203313 Fax: +92 51 9210835.
Earlier this week Sharjah Islamic Bank also announced plans to issue a US dollar-denominated Sukuk, while Khazanah Nasional, the Malaysian sovereign fund, is considering selling $500 million of exchangeable Sukuk according to a report by Bloomberg. An exchangeable sukuk is one which can be exchanged into shares.
UK MPs will move out of the Houses of Parliament for the first time since the Second World War, while the building has a £4bn facelift according to a report by the Times Newspaper of London.
A source close to the matter stated that although no clause in the contract specifically forbids the sale of alcohol at a future date, alcohol would not be served as the Sharia committee which approved the structure of the deal may revoke its previous approval, thereby damaging London’s credentials as a leading global centre for Islamic finance.
Richmond House, which currently hosts the health department, is one of three government buildings held by a special purpose vehicle (SPV) owned by the UK state under the HM Treasury UK Sovereign Sukuk PLC structure. The other building is Wellington House and a property on Whitehall.
The Ivory Coast has issued its second sukuk following the launch and issuing of sukuk from neighbouring Senegal and Togo.
Sukuk Profile
The Ivory Coast sukuk for a value of 150 billion CFA and a seven-year maturity is backed by the property assets of the state including the building of the International Trade Centre of Abidjan (ICC) in the Plateau district, valued at 98 billion FCFA, and administrative towers A and B which are the seat of several ministries. The sukuk represents Ivory Coast’s second sukuk after an issuance last year.
The lead arranger is the Islamic Corporation for the Development of the Private Sector (ICD), a subsidiary of the Islamic Development Bank (IDB). The co-lead managers are Bibe Finance & Securities (BFS), based in Cotonou, Bici Exchange (BNP Paribas Group) and BNI Finance Ivory Coast.
Centralized Shari’ah Board a “Step in the right direction”
Following recent bilateral discussions with the UAE, the IMF is keen for the UAE to continue tapping international capital markets following a recent Eurobond issuance by Abu Dhabi for $5 billion. To allow issuance at the federal level, including of Sukuk, the IMF recommended the UAE authorities approve the Public Debt Law and the Trust law.
Sukuk in particular were seen by the IMF as essential to help Islamic banks better manage their liquidity, whilst the recent approval of a centralized Shari’ah Board was seen as a step in the right direction to ensure consistency and clarity on Shari’ah governance of Islamic banks.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.
With strong support from the Islamic Corporation for the Development of the Private Sector (ICD), the Saudi Arabia based multilateral organization affiliated with the Islamic Development Bank (IDB) Group, Sovereign Sukuk issuances are making strong inroads with Togo most recently joining the club following previous successful issuances from Senegal and Ivory Coast.
Elsewhere Iran is slowly positioning itself to enter the international debt capital markets and has recently stated it has interest of up to $1 billion dollars supply for a potential sukuk.
Iran’s Need to Update Financial Laws to Allow Foreign Currency Inflows
Iran’s financial sector is wholly Sharia compliant by virtue of the passing of the Law for Usury (Interest)-Free Banking Operations in 1983. The use of law makes the Iranian banking system unique in that all banking activities must follow Sharia principles as a matter of legal requirement as opposed to at a regulatory level.
According to Al Monitor, The value of the sukuk market has tripled since last summer, reaching 215 trillion rials ($6.95 billion), but a major impediment to attracting international capital is Iranian financial law, which does not allow sukuk to be traded in foreign currencies — a major obstacle to the development of cross border Islamic finance activity, a market which predominantly is priced in US dollars.
“The government-backed bonds (sukuk) cannot be traded in foreign currencies. This has practically kept Iran’s sukuk out of global markets,” Mohammad Fetanat, chief of the Securities and Exchange Organization was quoted as saying.
Fetanat said he expects an update to Iran’s financial laws in a matter of months, and noted that there already is a huge demand for Iranian sukuk in regional and European markets. “In our negotiations with other countries, we received a request for $1 billion worth of Islamic bonds,” he said, without identifying the requester, expressing hope that billions of dollars of Islamic bonds will be offered on global markets should existing legal problems be addressed.
West African Sukuk Push
Togo is selling a 150 billion CFA franc ($251.40 million) Sukuk, its first Islamic finance instrument with a 10-year maturity and 6.5 percent yield. The Sukuk is currently in a subscription period which began on July 20 and runs to August 10.
Overlapping the Togo sale, neighbouring Senegal ended the subscription period for its second Sukuk on 19 July, though the final sukuk has yet to be issued. The proposed deal is backed by the assets of the international airport. Senegal last issued a Sukuk on 25 June 2014 for 100 billion CFA francs. The four-year issuance achieved a profit rate of 6.25% and was the first major sukuk issued by a West African nation. Ivory Coast later issued a five year 150 billion CFA francs on 28 December 2015.
Africans largest economy, Nigeria has set up a multi-agency committee to work out the modalities for the maiden sovereign sukuk likely to be issued towards the end of year.
Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia
Germany and Kuwait in Sukuk Pipeline
Germany (Aaa/AAA/AAA) is planning a $1 billion according to a USD Sukuk Pipeline report released by RHB Bank. Kuwait also plans to issue up to USD9.95bn via conventional bonds and Sukuk to cover its budget deficit.
Sukuk Pipeline
On ratings, Moody’s upgraded First Gulf Bank’s outlook to positive from stable following the announcement of a proposed merger with National Bank of Abu Dhabi (NBAD), which is expected to benefit from greater business diversification, stronger profitability and capital base and lower borrower and depositor concentrations. That said, FGB 1/17 traded tighter by 34bps at 1.31%.
Sukuk issuance is expected to pick up now that Ramadan has passed.
Sukuk Issuance
Bloomberg Malaysia Sukuk Index
Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) were largely steady at 105.0 (+0.32%) and 162.4 (+0.29%) respectively as the Eid al-Fitr holiday began. Yields tightened 5.5bps across the board to 2.364%, with financial names leading the rally — FGB 1/17 (-34bps), Noor Bank B3T1 Pc6/21 (-22bps) and Boubyan Bank B3AT1 Pc5/21 (-22bps). Brent oil touched USD46.76bbl/bbl (-7.1% WoW) after the weekly US crude oil inventory report from EIA that fell smaller-than-expected (2.2m bbl).
Elsewhere, the number of oil rig counts in the US climbed for a second straight week by 10 to 351 as reported by Baker Hughes.
Senegal has launched subscriptions for its second sovereign Sukuk issuance. The proposed 150 billion CFA francs deal is being offered at 6% profit rate with a 10-year maturity. The Islamic Corporation for the Development of the Private Sector (ICD), a multilateral organization affiliated with the Islamic Development Bank (IDB) Group is acting as the arranger for the sukuk.
The proposed deal is backed by the assets of the international airport.
A major significance of the Sukuk programme for both Senegal and Ivory Coast is the issuance in a local currency as opposed to in a hard international currency.
The West African CFA franc is the currency of eight independent states in West Africa who combined have a population of 105.7 million people (2014) and a combined GDP of US$78.4 billion (2012).
Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia
Highlights and Performance
Bloomberg Malaysia Sukuk
Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices ended relatively flat at 103.9 (+0.02%) and 159.8 +0.01%) respectively, with yields tightened marginally by 0.6bps to 2.470%. Combined with the Fed‘s dovish meeting (June 15), uncertainty over the Brexit referendum jitters (June 23) and mixed signals from China over slowing economy bring the risk-adverse sentiment. The top performers over the week were INDOIS 3/26 and GS 9/19, which moved -11bps to -13bps; while the underperformers were dominated by banking papers — EIB 1/17, Noor Bank B3T1 and DIB B2T1 which widened 12bps each.
Bank Indonesia
Bank Indonesia (BI) cuts key policy rates by 25bps in a surprise move, with the BI rate, deposit facility rate and 7-day reverse repo rate now stand at 6.50%, 4.50% and 5.25% respectively. In addition to the rate cut, BI also raised the minimum threshold on loan-to-funding ratio to 80% from 78%. Indonesia risk premiums widened 1.5bps to 196.0bps.
Elsewhere, Saudi Arabia missed out on MSCI emerging markets status as MSCI stated easier access for foreign investors is needed, as its CDS widened 4.4bps to 185.5bps. Similarly, Turkey CDS added 9.6bps to 264.0bps which was led by lower government budget balance of TRY3.7bn in May-16 from TRY5.4bn in Apr-16; and high unemployment although it edged down slightly to 10.1% in Mar-16 from 10.9% in Feb-16. Consensus expect further monetary easing by the Central Bank of Turkey (CBRT) will not be warranted on this June 21 meeting.
Sukuk Ratings Updates from Moody’s
On ratings, Moody’s upgraded Emaar Sukuk’s rating to Baa3/Sta from Ba1 to reflect ownership in mature recurring-revenue assets (which contributed about half of Group‘s EBITDA in 2015), substantial property sales backlog of AED40.3bn, access to sizeable 27m sqm land bank and robust liquidity. Moody’s also upgraded EIB Sukuk Company’s rating to A3/Sta followed by the same revision on its guarantor — Emirates NBD‘s rating.
In the MYR space, Bank Rakyat issued MYR300m 10nc5 B3T2 at 4.95% via Mumtaz Rakyat Sukuk (RAM: AA3), while TSH Sukuk (MARC: AA-) printed 5y at 5.10% and 7y at 5.30% on combined MYR150m. Meanwhile, Islamic Development Bank (MARC: AAA) plans to issue MYR400m Sukuk Wakalah through Tamadun Services Bhd (MARC: AAA).
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