Innovation to the fore in year of firsts for Asian Islamic finance
The headlines went to sovereign sukuk, most obviously Hong Kong. On September 18, the government of Hong Kong SAR launched a $1bn 144a/Reg S five year sukuk. Keenly awaited, the sukuk followed the legislative changes made in Hong Kong in July 2013 that created a level taxation framework between conventional bonds and sukuk, seen as a vital starting point for any Islamic capital market.
The deal, the first ever by a AAA government and the first from East Asia, was not really about the money — Hong Kong has plenty of ways it can raise sovereign debt. But in a similar way to the UK’s debut issue in June 2014, it was to make a point, sending out a message that Hong Kong was serious about becoming a marketplace for Islamic finance.
It also created quite some benchmark for others to price against. At 23bp over five year Treasuries, Hong Kong's deal was the tightest spread ever achieved on a benchmark dollar bond from an Asian ex-Japan government. Notably, less than half the deal went to Asia, as global demand created a $4.5bn order book.
While Pakistan was not a debut issuer when it launched its $1bn sukuk in November, it was the first sukuk from the country since 2005, and a difficult sell given its economic and political challenges. After attracting $2.3bn in demand, the deal was doubled in size from a planned $500m, and priced 50bp inside its conventional curve.
Again, it’s interesting to see where a bond like this goes: not to Asia, which took just 6% of the paper, but mainly the Middle East (53%) and the UK (24%). Even US investors, whose relationship with Pakistan can be fractious, bought 12% of the deal.
Indonesia’s $1.5bn 10 year global sovereign sukuk, launched a week before Hong Kong’s, was not the first from Indonesia, but it did have significance nonetheless. For a start, it created the largest order book ever from an Asian sukuk, at $10.2bn; it was also the first single tranche 10 year sukuk from an Asian sovereign.
But its lasting impact is likely to be a more subtle point: the fact that it used a new structure for a sovereign sukuk, wakala, rather than the usual methods of ijara assets and murabaha receivables. This allowed Indonesia to underpin the sukuk with government-owned properties leased to the Republic, and project assets, including assets under development.
As always, Malaysia was the home of the greatest innovation, in the sukuk markets and elsewhere. Khazanah, the state asset holding company, has been a regular fixture with exchangeable sukuk into its various underlying holdings, and in September it launched its latest, a seven year put four $500m exchangeable into Tenaga Nasional.
Again, there was structural ingenuity here: this was the first such structure to be based on mudaraba and murabaha, and was also the first such instrument to price at a negative yield. But it was unquestionably aggressive — an earlier version of the deal had been pulled three months earlier, and some in the market felt the final trade still pushed too hard.
Only 20% of it sold into Asia, with 80% going to European investors, giving a further example of how the marketing of Islamic transactions has evolved over time.
The inaugural sukuk from Export-Import Bank of Malaysia (Exim Bank), a $1bn multi-currency programme, was a landmark of sorts, being only the second export-import bank sukuk globally and the first in dollars. Like the Indonesia deal, this one used the wakala model, underpinned by leasable assets, shariah-compliant shares and a murabaha receivables component based on commodities. The proceeds will fund Exim Bank’s Islamic banking business.
Perhaps more significant still was Malaysia Airports Holdings’ MR1bn perpetual non call 10 sukuk launched in December. It was the first rated deal of its type anywhere in the world, a rating that came about by structuring the deal to achieve a 50% equity credit from the rating agencies.
CIMB saw the success of the deal as testament to the increasing depth and maturity of the Malaysian fixed income markets, with investors beginning to be more receptive towards structured finance transactions.
A couple of weeks after Malaysian Airports there was a similar deal, a perpetual subordinated sukuk musharaka from DRB-Hicom, rated single A. Bankers highlighted the positive investor response to the subordinated perp, despite being in a rating category where many investors have investment restrictions even in senior papers, let alone in subordinated. The deal raised MR715m through two perpetual tranches, one a non-call five, the other a non-call seven.
Bank capital always spurs innovation, and a MR3bn subordinated sukuk murabaha programme for AmIslamic Bank in February 2014 brought Malaysia’s first Basel III-compliant subordinated sukuk. It proved to be an influential deal: in the following months Maybank Islamic Bank, RHB Islamic Bank, Public Islamic Bank, Hong Leong Islamic Bank and Bank Islam all followed with similar deals.
One of Malaysia’s singular achievements is making itself a hub not only for sukuk in ringgit but in other currencies too. This was illustrated in yet another September deal, a $500m multicurrency sukuk wakala programme from Bank of Tokyo-Mitsubishi UFJ (Malaysia), which included a yen tranche, the first ever yen denominated sukuk in the global market.
Another significant deal was a MR3bn IMTN and ICP programme for a real estate investment trust, KLCC, and the Sabah Credit Corporation brought a distinctive musharaka structure when it launched a MR750m ICP and MR1.5bn IMTN programme.