Linklaters LLP has advised University Bank on its sukuk issuance in the United States. This is believed to be the first sukuk to be governed by the laws of the United States, in this case, the laws of the State of New York.

The U.S. dollar-denominated Shariah compliant perpetual sukuk issuance is intended to be recognised as Basel III-compliant, Additional Tier 1 capital by U.S. regulators, and is believed to be the first sukuk to be included within the Additional Tier 1 capital resources of a bank in the United States. The sukuk is limited to an annual profit rate of 5.75% and has no maturity date.

University Bank (a subsidiary of University Bancorp Inc.) is a community bank headquartered in Ann Arbor, Michigan which specialises in Islamic banking and mortgage subservicing for the credit union industry.

The Linklaters team on this transaction was led by Capital Markets partners Jonathan Fried (Dubai) and Matthew Poulter (New York), Financial Regulation partner Robin Maxwell (New York) and Global Head of Islamic Finance, Neil Miller.

The transaction represents a significant chapter in the evolution of sukuk. This is the ninth publicly announced Additional Tier 1 capital sukuk, and Linklaters has advised on all nine issues.

About University Bank

University Bank focuses on profitable growth through niche financial services provided locally, nationally and via the Internet. These niches are Community Banking, Credit Unions, Islamic Finance and Federal Housing Administration Lending.

Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

Malaysia Set to Issue New Sukuk; Turkish Banking Outlook Remained
Negative; ICD Priced USD300m 5y at 2.468%

Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices closed higher

Closing at 103.3 (+0.11%) and 158.3 (+0.13%) respectively, with yields declining 0.9bps to 2.486%. Gainers were led by Qatar ’23, PETMK ’20 and MALAYS ’25. Markets remained cautious ahead of first-quarter corporate earnings season and oil producers meeting on 17 April in Doha.

Oil prices jumped 8.5% to USD41.94/bbl on unexpected decline in US crude inventories and revived hope that major key producers may agree to curb their oil production after Kuwait expressed confidence about the deal, while dismissing the importance of Iran in the deal.

ICD Sukuk

Islamic Corporation for the Development of the Private Sector (ICD) via Hilal Services (Aa3/AA/AA) priced USD300m 5y Senior Sukuk at 2.468% (see sovereign/corporate update).

Meanwhile, the outlook for Turkey’s banking system on negative for the third consecutive year by Moody’s, owing to the system’s reliance on external wholesale markets which will expose to weaker international investor confidence and higher funding costs.

Banks also face pressures from increasing dollarisation of liabilities in light of lira’s depreciation.

MYR Space

In the MYR space, the MYR3.5bn 7y GII (reopening) auction closed at average yield of 3.932% (vs. WI of 3.935/915% a day prior to the tender closed), with strong BTC ratio of 2.686x.

Putrajaya Holdings (MARC: AAA) priced MYR535bn Sukuk al-Musyarakah in 3 tranches — MYR55m 6y at 4.20%, MYR250m 8y at 4.35% and MYR230m 9y at 4.40%.

The Islamic Corporation for the Development of the Private Sector (ICD) debut sukuk for $300m has been listed on the London Stock Exchange. The AA/(p)Aa3 (Fitch/Moody’s) rated Jeddah based supranational is a unit of Islamic Development Bank (IDB), issued a lacklusture debut sukuk which was downsized from $500 million to $300 million.

ICD’s key shareholders are IDB (AAA/Stable) and the Kingdom of Saudi Arabia (AA/Negative), who owns 45.6% and 18.2% of capital respectively. ICD is issuing the sukuk through a special purpose vehicle (SPV) Hilal Services Ltd established in the Cayman Islands.

Full details of the Sukuk including prospectus and structure can be found in the Sukuk.com Sukuk Database, the leading resource of the Islamic Finance industry.

Industry Body Releases Fifth Sukuk Report

Bahrain based Islamic Finance Industry Body, the International Islamic Financial Market (IIFM) has released the fifth edition of its highly respected Sukuk Report.

The report analyses the growth and the development of international and domestic Sukuk issuances in recent years globally and shed light on the different Sukuk structures widely used in various jurisdictions active in issuing Sukuk for the purpose of achieving a deeper understanding of the mechanism of this most popular financial instruments in the Islamic Capital and Money Market.

The demand for Sukuk from the Islamic jurisdictions in the GCC countries, including Bahrain, UAE, Saudi Arabia, Qatar as well as Malaysia, Indonesia, Turkey, Pakistan, Sudan, Brunei, Islamic Development Bank, remain the main force in maintaining the Sukuk appeal and growth. Further impetus to international Sukuk market is provided by the recent entry of Oman, United Kingdom, Luxembourg, Hong Kong, South Africa, several West African countries and the World Bank/IMF related entities.

The report concludes that Sukuk market growth particularly domestic short term Sukuk has dropped in 2015, due to Bank Negara Malaysia strategic decision to discontinue issuance of short term investment Sukuk, but overall trend remains encouraging. The entry of a number of new jurisdictions together with expansion of Sukuk issuances in established Sukuk countries is indication that Sukuk market will maintain its appeal and growth trajectory despite challenging global financial environment.

About IIFM

IIFM is a standard-setting organization for the Islamic Financial Services Industry focusing on standardization of Islamic financial contracts and product templates relating to the Capital & Money Market, Corporate Finance and Trade Finance segments of the industry.

IIFM plays its role in market unification by developing best practices at the global level and achieving Shari’ah harmonization through its eff orts for creation of a robust, transparent and efficient Islamic finance industry. IIFM also contributes in the development of the industry by organizing a number of industry awareness seminars and workshops.

Download Report

 International Islamic Financial Market (IIFM) Sukuk Report, 5th Edition published March 2016 (12.2 MB)

Downsizing of Sukuk

The Islamic Corporation for the Development of the Private Sector (ICD) has taken the usual step to downsize a planned Sukuk from $500m to $300m. The AA/(p)Aa3 (Fitch/Moody’s) rated Jeddah based supranational is a unit of Islamic Development Bank (IDB), said it had “retained a portion of the transaction” according to a quote published by Reuters attributed to the lead manager.

ICD’s ratings are driven by support from key shareholders, IDB (AAA/Stable) and Saudi Arabia (AA/Negative), which owns 45.6% and 18.2% of capital. ICD is issuing the sukuk through a special purpose vehicle (SPV) Hilal Services Ltd established in the Cayman Islands. The issuance will be listed on the London Stock Exchange.

The planned five year debut issuance was launched last week and downsized after being incorrectly priced compared to more liquid credits in the market according to bankers familiar with the deal. “If we had added a few basis points, we would have had a larger size,” the same source added.

Banks Added as Arrangers Mid-Deal

The sukuk was being arranged by eight banks but another two (Noor Bank and Warba Bank) had been added to the list in order to tap a larger investor base, indicating it was a struggle for ICD to even reach $300 million.

A Gulf based banker from one the arrangers said the lack of buyers of the paper reflected the challenging times Gulf based banks are facing. He stated colleagues were surprised at the pricing of the deal and that as a development unit which exists to assist the private sector to issue Sharia’h compliant deals, the ICD embarrassed itself in this transaction as it is unheard of for an AA rated issuer to downgrade the size of a sukuk, particularly a supranational which helps and advises others on the process of issuing sukuk.

ICD has previously successfully arranged debut sukuk for Senegal and Ivory Coast.

Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

Sukuk Indices Edge Higher

Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices closed higher at 103.1 (+0.34%) and 158.1 (+0.32%) respectively, as yields declined 6.7bps to 2.495%. The gains were led by QATAR ’23, MALAYS ’25 and PETMK ’20. Oil prices ended the week at USD38.67/bbl (-4.4%) after the Saudi’s deputy crown prince, Mohammed bin Salman said the kingdom will freeze its oil production only if Iran and other major producers agree to curb theirs, leaves the outcome of the Doha producers’ freeze talk on 17 April in doubt.

While Fed Chair Janet Yellen reiterated her views to “proceed cautiously” in raising interest rates given continued challenging global conditions that could weigh on domestic growth, after the recent hawkish comments by Fed Harker, Williams, Lockhart and Bullard.

Saudi’s money supply M3 growth slows

Saudi’s money supply M3 growth decelerated at -0.9% YoY in Feb-16 from 3.7% in Jan-16 and 2.6% average in 2015, resulting the Saudi Riyal Interbank Average Offered Rate for 12-month to climb to 7-year high of 2.001% (see Chart of the Week).

The fall in money supply adjusts in line with net foreign assets which was down by 1.7% to SAR2.2trn. Saudi banks’ loan-to-deposit (LTD) ratio climbed to 88.1% in Feb-16 from 86.1% in Jan-16, following relaxation of LTD ratio to 90% last February. Accordingly, Saudi’s CDS tightened 2.6bps to 155bps. Elsewhere, Turkey’s economy grew at 5.7% in 4Q15 and 4% over 2015 as a whole. Trade deficit narrowed to USD3.2bn in Feb-16 from USD3.8bn in Jan-16 with exports rose 1.4% first time in 4 months, which saw its CDS tighten 12.9bps to 259.7bps.

Malaysia Rating Affirmed by S&P at A-/Sta

On ratings, S&P affirmed Malaysia rating at A-/Sta on expectations of credible fiscal and monetary policies, strong external position and fairly diverse economy that could absorb weakness in the oil and gas sector. Hong Kong’s (Aa1/AAA/AAA) outlook was revised to negative from stable by S&P to reflect economic imbalance in China, given financial and economic linkages as well as the ultimate sovereign authority of China.

This was followed by the same revision on China’s outlook. Sime Darby (Baa1/BBB+/BBB+) was downgraded 2 notches to BBB+ from A with a negative outlook by Fitch, reflecting the extended pressure on high leverage, with delays in debt reduction plans due to the challenging operation environment in the industrial and palm oil segments.

Malaysia Airline MYR Sukuk

In the MYR primaries, Malaysia Airline Berhad (NR) priced MYR1.5bn Pc23 sukuk at profit rate of 6.10%.

MYR 3.5 billion sukuk achieves profit rate of 3.743%

As part of its GII issuance programme, the Government of Malaysia issued a MYR 3.5 billion sukuk. The five and half year issuance which matures in August 2021 received orders of MYR 9.96 Billion from 277 bids and achieved a profit rate of 3.743%, comparing favourably to its previous issuance at end of October 2015.

Government of Malaysia GII

GII is issued based on Murabahah concept. GII based on Murabahah contract is essentially a certificate of indebtedness arising from a deferred  mark-up sale transaction of an asset, such as commodity (mainly crude palm oil),  which complies with Shariah principles. The issuance under Murabahah contract  will involve commodity transactions to create indebtedness between the sukuk issuer
and the investors.

Government Investment Issue Structure

Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

Index Gains

The Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices gained 0.13-0.33% to end at 102.4 and 156.5 respectively, with weighted average  yields fell 1.1bps to 2.59%. Gainers were led by SHARSK ’24, QATAR ’23, MAFUAE ’25 and SECO ’23. Brent extended gains to the second week, settling 10.3% higher to USD38.7/bbl following Energy Information Administration’s (EIA) report decline in supply of 25,000 bpd to about 9.2m bpd in US shale production in December. On the other hand, Moody’s downgraded the sovereign ratings of Bahrain to Ba1, and placed it on review for further downgrade together with other GCC countries — Abu Dhabi (Aa2), Kuwait (Aa2), Qatar (Aa2), Saudi Arabia (Aa3) and United Arab Emirates (Aa2).

The review will be based on the extent of the impact of low oil prices on economic performance and government balance sheet. Thus, the yields in the GCC region will increasingly sensitive at least in the two months of review, in our opinion.

Islamic Development Bank Sukuk

Islamic Development Bank (Aaa/AAA/AAA) via IDB Trust Services issued a USD1.5bn 5y sukuk at profit rate of 1.775% (MS+50bps). The initial price guidance was between MS+50/55bps, the profit rate is much lower than the March 2015 issuance (ISDB 1.831% 12/3/20 USD1bn, MS+8bps), although at higher spread over mid-swap. Reaffirmed by its AAA ratings, IDB’s sizeable issuance demonstrates its strong credit and financial position. The IDB complex widened overall during the week, nevertheless on a year-to-date basis, IDB 18-20 tightened by an average of 22bps.

Axiata (Baa2/BBB+/NR) plans to arrange investor meetings commencing on 7 March for a dollar sukuk under Axiata SPV2’s multi-currency sukuk MTN programme. Sime Darby (Baa1/BBB+/A) was downgraded to Baa1/Neg from A3 to reflect extended pressure on its financial profile and delays in its debt reduction plans.

Malaysia Space

In the MYR space, BGSM Management (A3) priced MYR300m 10y IMTN at 5.35% while Gulf Investment Corporation (AAA) is targeting a MYR450m 5y IMTN offering and may launch the deal as soon as this  week. On the ratings front, MEX II’s MYR1.3bn sukuk murabahah programme and MYR150m junior bonds were assigned preliminary ratings of AA-/Sta and A-/Sta. The proceeds from the issuances will be mainly used for construction cost and interest during construction of the 16.8km Lebuhraya Putrajaya-KLIA (MEX extension) project. Alam Maritim Resources’ outlook was downgraded to Negative, on weakening business prospects as a result of reduction in its order book amid challenges faced from the current oil and gas industry.

Sukuk Pipeline

Sukuk Supply March 2016

IDB Sukuk Issuance

The Islamic Development Bank (IDB) successfully issued a $1.5 billion sukuk yesterday achieving a profit rate of 1.775%. This compares favourably with its $1 billion issuance last year where it achieved a higher profit rate of 1.83%.

IDB and Mali Water Funding Agreement

The Islamic Development Bank (IDB) and the Republic of Mali have signed a US $44 million agreement for Phase II of the Kabala Water Project. The project is expected to provide drinking water and improve living conditions for 8.5 million people in and around Bamako.

The agreement was signed by IDB’s Acting President, Dr. Ahmet Tiktik and Mali’s Minister for Energy and Water, Mr. Mamadou Frankaly Keita, at IDB headquarters in Jeddah.

Once completed, the project will greatly reduce the outbreaks of cholera and other water-borne diseases. The overall project will improve water access in and around Bamako City from 60.25 per cent in 2013 to 75 per cent in 2020, and later to 80 per cent.

“This project is very important for the people of Mali,” said Dr. Tiktik. “IDB will work together with the Government of Mali to expedite implementation.”

The Acting President told the Malian delegation that IDB is “their institution”, and will do everything possible to support its member countries.

Dr. Tiktik led the IDB delegation to Brussels in 2013 for an international donor conference that mobilized €3.25 billion to rebuild Mali.

Prior to signing the Phase II agreement, Mr. Keita and Mali’s Minister of Equipment and Transport, Mr. Mamadou Hachim Koumare, visited IDB’s Vice President of Operations, Dr. Mansur Muhtar, to review IDB projects in Mali.

Dr. Muhtar noted that IDB understands Mali’s priorities and assured the delegation that the Bank is prepared to support the government’s development efforts. He said that apart from providing financing for various projects, IDB would work with other countries through the Reverse Linkage Initiative to address some of Mali’s challenges in the area of capacity building.

“IDB has been a strategic partner and has never left Mali, no matter the circumstance,” said Mr. Koumare. “That is why we are here to express our appreciation and see how we can strengthen our cooperation. The aim of our visit is to finalize discussion on the construction of Modibo Keita International Airport and propose new infrastructure projects for the consideration of the Bank. We would also like to invite IDB to participate in the technical and financial partners meeting on transport
infrastructure for the reconstruction of northern Mali, to be held in Bamako from 24-25 March 2016.”

The Republic of Mali joined IDB in 1978. Since then, IDB has financed several development projects in the country totaling US $950 million.

Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

Dwindling Expectations for Fed Rate Hike Continues to Drive Support

The Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices gained 0.30% to end at 101.9 and 155.1 respectively, with weighted average yields declining 5.5bps to 2.66%.The gains were led by government and government-related entities such as SECO ’22-24, Qatar ’23 and ISDB ’20 as investors flocked to safety following global stock selloffs which intensified and more dovish comments from Fed Chair Janet Yellen.

There is now less than 50% chances of Fed hike this year, based on Bloomberg consensus. On the other hand, Brent prices surged 12.3% last Friday on hopes of an OPEC production cut after the Wall Street Journal reported UAE’s energy minister as saying OPEC members were ready to cooperate on possible production cuts. Nevertheless, oil prices still suffered a weekly loss of 2.1% to USD33.4/bbl.

CDS Spreads Widen

CDS spreads widened for Bahrain, Saudi Arabia, Turkey, Malaysia and Indonesia (Figure 5). Cost of insuring against a Bahrain, Saudi Arabia and Turkey 5y sovereign debt default widened 6.7bps- 4.9bps to 194bps-399.5bps. Correspondingly, Malaysia’s CDS spreads widened 9bps to 194bps, dampened by a weaker pace in industrial output growth (4Q15: 2.9% YoY; 3Q15: 4.5% YoY) that envisaged a slower real GDP growth for a similar period (4Q15: 4.4% YoY), based on our economists.

The Indonesian government has recently made progress in spurring investment inflows through relaxed foreign investment restrictions in various sectors, with its sovereign 5y Indonesia CDS trading in the 253bps area (+6.2bps).

Malaysian Issuances

In the MYR space, UMW Holdings printed MYR200m (AAA) 3y and 5y tranches at 4.5% and 4.7% respectively, for refinancing purposes. On the ratings front, MARC assigned AA-IS preliminary rating with a negative outlook to Sime Darby’s MYR3bn perpetual subordinated sukuk programme. The negative outlook reflects slower-than-expected pace of de-gearing after substantially debt-funded acquisition of New Britain Palm oil Limited in Mar-15 coupled with a weaker earnings and cash flow generation.

USD Sukuk Supply (as at 12-Feb-2016)

Sukuk Pipeline