Khazanah Nasional made a solid return to the US dollar bond market in May when it priced a hugely successful US$1bn dual-tranche Reg S sukuk that overcame challenges posed by interest rate volatility, an unrated credit profile and changes to sharia standards in the Middle East.
The Malaysian state-owned investment fund had targeted a benchmark US dollar deal with five and 10-year tenors in a combination of conventional and sukuk format but did not want to seek a rating for the Reg S notes.
The borrower’s plans also came at a time when the rates environment was not the most accommodating. The 10-year US Treasury yield had risen from 1.08% in early February to 1.57% in early May. In April, fears of a potential default at China Huarong Asset Management sparked a broad sell-off and a widening of spreads in parts of the Asian credit market.
The unrated Khazanah notes faced a major disadvantage – Malaysian investors could not buy them due to local regulations. To counter that, Khazanah and its joint leads CIMB, DBS, JP Morgan, MUFG and OCBC Bank targeted Middle Eastern investors by deciding the entire deal should comprise sharia-compliant notes. The sukuk was structured on the wakala principle where the underlying assets comprise sharia-compliant shares and commodity murabaha investments.
The leads arranged a three-day roadshow to reintroduce Khazanah to Asian, European and Middle Eastern buyers after a five-year absence from the US dollar bond market. Feedback was strong, prompting the banks to open books on May 4 at an initial price guidance of Treasuries plus 125bp for the five-year tranche and plus 150bp for the 10-year tranche.
Orders piled in, with Asian accounts putting in US$3.5bn before noon. In European hours, the book peaked around US$6bn.
The deal finally priced with the US$400m 1.658% five-year tranche set at 85bp and the US$600m 2.78% 10-year tranche at 120bp. The final book held US$2.6bn for the five-year and US$2.7bn for the 10-year.
Targeting Middle Eastern accounts bore fruit as that region accounted for 22% of each tranche. This was an achievement given that these investors had been concerned about changes to sukuk terms and clauses needed to comply with the standards of the Accounting and Auditing Organization for Islamic Financial Institutions. The issuer and its leads redoubled their efforts to address concerns that this could affect the tradability of the notes and won over the investors.
As a result, the US$1bn deal from Khazanah became the largest unrated US dollar sukuk offering at that time, with the lowest yield and spreads for an unrated US dollar deal from a Malaysian corporate issuer.
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