Islamic bonds made some important headway globally in 2014, and Malaysia Building Society’s M$495m (US$147m) structured covered sukuk was a major step in opening more funding avenues in Asia’s biggest Sharia-compliant market.
MBS was keen to tap the bond markets to take advantage of positive funding conditions, but its standalone rating of A2 from local agencies posed a barrier because Single A credits do not appeal to local institutional investors.
Despite the lack of legislation for covered bonds in Malaysia, RHB found a solution with mimicked a structure that provides stable, low-cost funding for banks elsewhere, potentially creating a template for other Malaysian lenders to use.
The issue comprised eight tranches at tenors of one to seven years, with profit rates ranging from 3.84% to 4.68%. The bond was secured against Islamic personal financing receivables of MBS, which provides personal finance facilities to civil servants.
The sukuk was priced on December 18 2013 with RHB Investment Bank as sole principal and structuring adviser. Investors have dual recourse to the issuer and the pool of securitised assets in the first structure of its kind in Asia.
Personal loan receivables are not typical assets used in mature markets, where covered bonds are sold, but, in the case of MBS, a key advantage is that interest and principal payments of personal loans are deducted at source, thus mitigating bond-payment risks.
The issue also benefits from available over-collateralisation of 14.4%, which gives reasonable protection against default risks, a liquidity reserve account and stop-issuance triggers.
The portfolio of personal loans as cover assets was carved out under a special-purpose vehicle, called Jana Kapital. This gives bondholders legal access to the assets to satisfy their claims if they are unable to do so directly from the issuer.
The structure earned the sukuk an AA1 from Ram, a four notches better than the rating of MBS. However, the issue faced a couple of challenges. The new structure stumped the Sharia committee, which took a while to understand the mechanics, and the borrower and its lead had to work hard to educate investors.
When the sukuk was put to the market finally in December 2013, most investors had closed their books for the year. Moreover, Bank Negara Malaysia had not relaxed its risk-charge rule for MBS.
Still, the dual-recourse nature resulted in a 1.35x oversubscription and helped the bond to price at an average 80bp–90bp over Malaysian Government securities. Demand remained strong for the innovative bonds, with the spread tightening to about 60bp as of November 2014.
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