Islamic Asset Pool Widens With CIMB’s First Collateralized Sukuk
CIMB Group Holdings Bhd. plans to sell a sukuk backed by a pool of loans, becoming the world’s first Islamic bank to sell the type of collateralized debt that contributed to the global financial crisis.
The Malaysian lender is seeking to raise 1 billion ringgit ($274 million) from an offering of five-year notes this quarter, CIMB Islamic Bank Bhd.’s Chief Executive Officer Badlisyah Abdul Ghani said in an April 3 interview in Kuala Lumpur. State-owned mortgage company Cagamas Bhd., the nation’s biggest corporate bond issuer, already sells such securities in their Islamic and conventional forms.
The concept could catch on in the Middle East if Shariah scholars give approval, with the quality of the issuer and the underlying assets being key for buyers, according to Asian Finance Bank Bhd. The securitized debt will diversify funding options in the $1.7 trillion Islamic finance industry, where innovative products are being rolled out to meet investor demand. The past two years have seen debut offerings of perpetual notes, Basel III bonds and covered securities.
“The issuance is positive as it will start a new asset class and help banks strengthen their asset base,” Mohd. Effendi Abdullah, Kuala Lumpur-based head of Islamic markets at AmInvestment Bank Bhd., last year’s third-biggest sukuk arranger, said by phone Monday. “Some investors, however, may demand a premium given what had happened in the past.”
Sukuk pay returns from an underlying asset to comply with Islam’s ban on interest and are vetted by scholars to ensure compliance with Shariah law, which promotes risk-sharing and condones speculation.
CIMB Islamic’s new notes will be sold via private placement to investors who are comfortable with this type of security, CEO Badlisyah said. The loans backing the debt are sold on to the bondholders who only have a claim on the underlying assets and not the issuer, he said.
Collateralized bonds attracted controversy when securities backed by U.S. subprime mortgages triggered the 2008 crisis as housing prices collapsed, causing the bankruptcy of Lehman Brothers Holdings Inc. and consequently tougher scrutiny.
Under Shariah law it’s different because the underlying assets cannot be securitized more than once unlike their conventional counterparts, Badlisyah said. “That automatically acts as an immediate mitigant to risk.”
While securitized sukuk can also be used by financial institutions to boost Basel III capital-adequacy requirements, they haven’t taken hold because they tend to be more expensive, Badlisyah said.
Bonds that comply with the Basel Committee on Banking Supervision rules issued in 2010 to provide banks with an extra buffer against losses following the financial crisis are typically higher-yielding as they can be written down if regulators deem the issuer as non-viable.
“If CIMB Islamic is successful with the issuance, it could be a trendsetter in Malaysia,” Mohamed Azahari Kamil, chief executive officer of Asian Finance Bank in Kuala Lumpur, said by phone Monday. “It could also catch on in the Middle East, if the structure is approved by the scholars.”
Shariah scholars have tightened rules to reduce risk associated with collateralized debt, including ensuring that all sukuk are asset backed and that redemptions must be based on the assets’ market value, Mohamed Azahari said.
CIMB Islamic’s 4.2 percent regular sukuk maturing in April 2021 yielded 4.21 percent when last traded on March 26, data from Bursa Malaysia Bhd. shows. The ringgit-denominated notes are rated AA+ by Malaysian Rating Corp., the second-highest investment grade. Shariah-compliant bonds tend to be infrequently traded because of the supply constraints.
The yield on the Cagamas 5.9 percent sukuk due in October 2020 was little changed at 4.37 percent Tuesday after falling eight basis points in March, the biggest monthly drop in more than a year, data compiled by Bloomberg show.
CIMB Islamic’s holding company, CIMB Group, has total debt outstanding of 24.2 billion ringgit, data compiled by Bloomberg show. The group is rated A3, the fourth-lowest investment grade by Moody’s Investors Service, and AA1 by Kuala Lumpur-based RAM Rating Services Bhd., the second-highest score.
The Shariah-compliant unit, with assets totaling 50.4 billion ringgit as of September, set up a 5 billion ringgit sukuk program complying with Basel III guidelines in August. It has yet to tap the facility.
“It’s difficult to assess the risks without much details on the structure and type of loans involved,” Jesse Liew, Kuala Lumpur-based head of global Islamic bonds at BNP Paribas Investment Partners Malaysia, which has more than $900 million of assets, said by phone Monday. “As long as the debt has a mechanism in place to protect investors, demand will be there.