Cross-border sukuk on the rise

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Cross-border sukuk on the rise

Cross-border sukuk on the rise


Cross-border sukuk originations into and out of Malaysia are set to increase as the global sukuk market continues its rebound. Investors are looking for better and more diversified returns, as the Malaysian government’s policy of encouraging government-linked companies (GLCs) and local financial institutions and corporates to increase their cross-border exposure to Islamic capital market instruments start to take effect.

Foreign issuers that have originated sukuk in Malaysia include the World Bank and its private sector funding arm, the International Finance Corporation (IFC), The Islamic Development Bank, Nomura and the National Bank of Abu Dhabi.

The Japan Bank for International Cooperation (JBIC) was on the verge of using a sukuk, only to be foiled by the onset of the global financial crisis and the credit crunch in 2008.

In the other direction, last year Khazanah Nasional Berhad, Malaysia’s sovereign wealth fund, issued its first cross-border sukuk in Singapore.

Indeed, Kuwait-based Gulf Investment Corporation (GIC), whose shareholders include the governments of the six Gulf Cooperation Council (GCC) states (Kuwait, Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman), is the latest Middle East institution to raise funds from the Malaysian market through a 600 million Malaysian ringgit ($196 million) local currency five-year Sukuk Wakala bi Istithmar issuance, which will be officially launched on March 1.

The issuance is the first tranche of a 3.5 billion Malaysian ringgit (RM) Sukuk Wakalah bi Istithmar Program planned by GIC.

Leading Malaysian rating agency, RAM Ratings, has assigned a long-term rating of AAA to the corporation’s RM3.5 billion sukuk program. Concurrently, RAM Ratings has also reaffirmed GIC’s respective AAA and P1 long-and short-term financial institution ratings, and its AAA long-term ratings of the corporation’s RM600 million conventional Senior Unsecured Bonds (2008/2013) and RM400 million Senior Unsecured Bonds (2008/2023). All the long-term ratings have a stable outlook.

In its ratings rationale, RAM Ratings stressed “GIC’s ratings remain supported by its unique position within the GCC region, and the strong support from its shareholders. GIC’s mandate is to support the development of private enterprises and economic growth within the GIC region. Given its strategic role, the corporation enjoys immunity and exceptions in terms of regional regulatory norms, including exemptions from asset nationalization, currency controls and taxes.”

The corporation reported a net profit of $129 million for the first nine months of 2010, surpassing the $91 million for the entire fiscal year 2009. RAM Ratings stressed that the performance of GIC’s key principal investments, particularly those in metal-and petrochemical-related industries, driven by the more encouraging economic outlook on the GCC, have improved.

While the corporation recorded a larger share of profits from its subsidiaries and associates in the same nine-month period, its dividend receipts for the year are expected to remain unchanged from historical levels given the nascent stage of its major principal investments.

The GIC sukuk issue was oversubscribed and the issuer decided to increase the size from RM500 million to RM600 million. It was jointly managed by Royal Bank of Scotland (RBS), who was also the adviser and book runner, and Maybank Investment Bank, and was priced at a yield of 5.25 percent.

The GIC sukuk follows the recent RM500 million 10-year sukuk issued by the National Bank of Abu Dhabi.

Malaysia originates more than 60 percent of global sukuk outstanding. This has generated significant cross-border flows as funds are raised from beyond domestic financial markets and as investors diversify their portfolios into assets from other jurisdictions. According to the Securities Commission, between January and September 2010, over 55 percent of all bonds approved by the commission were sukuk.

GIC, stressed RAM Ratings, is perceived to have a healthy liquidity position. At end-September 2010, its cash balances and available-for-sale securities amounted to $633 million and $2.5 billion respectively.

Contrasting against the corporation’s $565 million of debt repayments due in December 2011, these are adequate. At the same time, GIC’s overall risk-weighted capital-adequacy ratio (RWCAR) had increased to 30.23 percent at end September 2010 compared with 27.7 percent at end December 2009, backed by profit accumulation and revaluation gains on its equity investments.

At the same time, the de-leveraging of its balance sheet eased its leverage ratio (total assets/equity) from 3.5 times to 2.8 times.

While the expansion of the corporation’s equity investment portfolio will elevate both its RWCAR and leverage ratios, the management, according to the Malaysian rating agency, will maintain a prudent near-term minimum RWCAR of 20 percent and a maximum leverage ratio of four times.

In his budget 2011 speech to the Malaysian Parliament late October, Prime Minister Mohd Najib Tun Abdul Razak emphasizes the transformation of Malaysia into a developed and high-income economy with inclusive and sustainable development, spearheaded by the private sector. A number of strategic high-impact projects are expected to involve both conventional and Islamic financing and investment.

To this end, government-linked investment companies (GLICs) will be allowed to increase investment in overseas markets to explore opportunities for better returns. For example, the Employees Provident Fund (EPF) will increase its investment overseas from the current 7 percent to 20 percent of the total assets managed, including in Islamic instruments such as sukuk.

“Efforts will be taken to strengthen Malaysia’s position as a premier Islamic capital market,” said Najib. “Bursa Malaysia will develop an international board to enable foreign securities to be listed, including Shariah-compliant products. To further promote innovation in Islamic securities products, the government proposes that expenses for the issuance of Islamic securities which adopt the principles of Murabaha and Bai Bithaman Ajil based on Tawarru’ be given tax deduction. This will strengthen Malaysia’s position as the leading sukuk market and promote transactions in Bursa Suq al-Sila, the world’s first Shariah-compliant commodity trading platform. The government proposes that Takaful contributions for export credit be given double tax deduction.”

Bursa Malaysia, the national stock exchange, stresses that the global sukuk market saw a rebound in 2010 with total issuance outstanding reaching $30 billion, an increase of 20 percent on 2009 and double the volume of 2008, when the market hit an all-time low. Bursa Malaysia in fact attracted some $8.6 billion of sukuk listings in 2010, accounting for almost one-third of total global issuances.

The listings include Sime Darby Berhad’s RM4.5 billion Musyarakah Sukuk; the government of Malaysia’s $1.25 billion Global Sukuk Al-Ijarah and the Islamic Development Bank’s $3.5 billion sukuk. The total value of sukuk listed on Bursa Malaysia at Dec. 31, 2010 stood at $27.7 billion, thus retaining the exchange’s position as the leading sukuk listing destination in the world.

“[The] general consensus amongst industry players is that global sukuk issuances for 2011 will surpass the record high of $34.2 billion in 2007,” says Raja Teh Maimunah, global head of Islamic markets at Bursa Malaysia.

“As Malaysia has a well-established legal and regulatory framework to support sukuk issues, we are hopeful that 2011 holds greater promise in this space for us. We are seeing issuers more willing to list their issues and be subjected to reporting and disclosure requirements in order to attract investors, as the credit crisis have caused investors to be more aware of the importance of transparency and are thus demanding greater governance. We see this as a positive development as the industry steps to the next level in embracing higher governance standards.”

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