Growing beyond the homeland

IFR Top 250 2012
8 min read

Global sukuk issuance this year will be up to US$44bn, with 60% of that from Malaysia – while other Asian markets are trying to muscle in on the act, it may not happen overnight.

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Other debt markets have been bounced around by volatility, but the global sukuk market has seen growth, tightening spreads and is now looking beyond its natural homelands to new markets across the Asia-Pacific region. To put that into perspective, global sukuk issuance totalled US$26.5bn last year. This year it is heading towards US$44bn – with 60% of that from Malaysia, according to HSBC data.

There is no doubt that Asia is where the headlines are. “With the Projek Lebuhraya Usahasama Berhad M$31bn sukuk and the Tanjung Bin Energy Issuer Berhad M$3.29bn sukuk issued in the first quarter alone, we are heading for a record year in 2012,” said Wynce Low, director and head of DCM, global capital financing, HSBC Bank Malaysia.

Both deals stand out and in some ways are at the core of traditional sukuk issuance which is used for funding infrastructure projects. The infrastructure deal from Projek Lebuhraya Usahasama Berhad equivalent to US$9.7bn is the world’s largest corporate sukuk to date. It comprised four tranches, two which were sold and two which were publicly placed. To give an idea of demand, the M$11.3bn portion, rated Triple A by MARC, and which was itself made up of 15 tranches offering tenors from five years to 19 years, saw a book that was almost five times oversubscribed when it printed in January.

“Malaysia is simply a more mature market. It has the most comprehensive legislative framework”

Similarly in mid-March, the M$3.29bn sukuk for Tanjung Bin Energy, a jumbo project financing deal for the expansion of a coal-fired power plant in Malaysia, impressed investors. Made up of 31 tranches that stretched from a five-year tranche at 4.65% to a 20-year tranche at 6.2%, it proved there was still life in infrastructure projects.

“Malaysia is simply a more mature market. It has the most comprehensive legislative framework. The combination of the two creates the situation today – more issuance and pick-up is inevitably better than before,” said Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank.

And there is a growing maturity in the market that is putting the difficulties of 2010, the taints of Dubai’s debt restructuring and a couple of embarrassing sukuk defaults, behind it.

At the end of June last year, Malaysia’s US$2bn sukuk hit orders of US$9bn. The US$1.2bn five-year tranche priced at Treasuries plus 145bp while the US$800m 10-year portion went for Treasuries plus 165bp – 2.991% and 4.646% respectively. The former printed 5bp inside the outstanding curve. And when Indonesia came in November, its US$1bn seven-year deal was more than six times covered and paid only 4%, a negligible 20bp new issue concession over the sovereign’s conventional curve.

So what is the attraction of the asset class? First and foremost it is straight supply and demand – that is where the money is. As Rafe Haneef, managing director of Amanah Global Markets, Asia-Pacific and chief executive of HSBC Amanah Malaysia, said: “If you are selling into a market where there is a dominant Muslim population, a straight bond might alienate 40%– 50% of fund managers. A sukuk issue doesn’t and, more to the point, commercial investors will buy it.” Malaysia is the fourth-largest bond market in Asia.

Then, as significantly, sukuk issues have become a cheaper way to borrow money. The premia that borrowers have traditionally had to pay has slowly eroded. And you can see investor enthusiasm in that sukuk are trading tighter in secondary. Malaysian global sukuk are at 2.92%/2.736% and 4.57%/4.511%, while the Indonesia global above, has traded in to 3.7%/3.6%.

China moves

Given investor demand, it is unsurprising then that several other markets in Asia are also looking to tap into this market. First and foremost is China. The standout deal of the past 12 months – in symbolism if nothing else – has been the landmark Dim Sum sukuk sold by Khazanah Nasional, the Malaysian government’s investment holding arm, in mid-October. The increased Rmb500m (US$78m) three-year deal printed at the tight end of guidance at 2.9% on books of Rmb1bn. Bankers were soon enthusing about what they had dubbed the New Silk Road.

“This is an innovative, market driven and major step forward in the development of the offshore renminbi market and supports the Chinese government’s move to internationalise the renminbi,” said Tan Sri Andrew Sheng, chief adviser to the China Banking Regulatory Commission.

There is no doubt that the signs are good, even if it is too early to speak of a sukuk Dim Sum market. CIMB’s Abdul Ghani calls it “experimental and a real step” while HSBC’s Haneef describes it as a “strategic exercise”.

The latter points out that the driver for the deal was a Khazanah investment in China and that it was the issuer that pushed for an Islamic alternative. He said that although the deal was denominated in renminbi, it was executed through Kuala Lumpur off Khazanah’s existing sukuk issuance programme. Not that Hong Kong has been resting on its laurels. At the end of March, it launched a two-month consultation on tax changes designed to encourage more Islamic bonds.

Japan joins the club

Japan has also put the nuts and bolts together for real Islamic issuance. It has been a long time coming. Both retailer Aeon and Toyota have issued Sharia-compliant bonds in Malaysia in 2007 and 2008 respectively, but only in local currency and only through locally incorporated subsidiaries. In July 2010 Nomura sold a US$100m two-year al-ijara at 60bp over six-month Libor, the first US dollar-denominated Islamic bond from a Japanese multinational.

Since the beginning of April, however, tax laws have been tweaked and Islamic bonds can be cleared at the Japan Securities Depository Center and the hope is that both domestic and foreign issuers will line up to sell sukuk.

NAB on the go

Elsewhere, Australia is also looking to dip its toes in the water, primarily to attract the Gulf sovereign wealth funds. One of Australia’s big four banks, National Australia Bank has long been looking at a sukuk issuance.

“There is enormous potential for Islamic funds from the Australian community and from abroad, mirroring the significant growth that we have seen in similar funds overseas,” says Talal Yassine, founder and managing director of Crescent Wealth, an Australian wealth manager with a specialist focus on Islamic investing. But NAB’s rumoured debut of up to US$500m issuance is not likely much before the end of the year.

So is Malaysia’s dominant role in the market threatened? Unlikely in the short term. Herman Bake, head of global risk syndicate in Asia for Deutsche Bank said: “The Islamic investor base is yield-hungry. I don’t see it buying Japanese or Australian sukuk in a hurry.” Nonetheless, it is a step in the right direction.

Where we are likely to see the change is in the number of companies, specifically Asian and European companies raising money in the sukuk market. Most famously British retailer Tesco issued its first sukuk in 2007 but, as well as the Japanese companies mentioned above, those, such as Hong Kong’s Nobel Group are currently looking at sukuk as an option. Indeed it is a sign of how far the market has developed that, as Deutsche Bank’s Bake pointed out: “European investors now see sukuk and conventional bonds interchangeably”.

Growing beyond the homeland