Malaysian state investment agency Khazanah Nasional yesterday evening decided to postpone its debut dim sum sukuk as financial markets suffered from a severe bout of volatility.
The deal was supposed to be a landmark transaction for Khazanah, which is keen to promote Islamic financing in the offshore renminbi space. But, despite its blue-chip status, the market volatility proved to be too much and the leads -- BOC International, CIMB and Royal Bank of Scotland (RBS) -- decided that the most prudent decision would be to hold off.
The investment agency concluded roadshows on Tuesday but because investors still had questions on the sukuk structure and needed time to digest it, the company only started marketing the three-year renminbi-denominated bond yesterday morning. The initial whisper was for a yield in the area of 2%.
The deal size was expected to be Rmb300 million to Rmb500 million ($47 million to $78 million). Investors were told yesterday morning that the order book was 1.5 times covered and that the deal could price as early as yesterday evening.
Markets were weak yesterday morning as investors were disappointed by the Federal Reserve's downbeat outlook on the US economy and HSBC's preliminary China manufacturing PMI data for September showed that growth continued to moderate.
As the day progressed, market conditions rapidly deteriorated. By the end of Asian trading, the new iTraxx Asia Investment Grade Index series 16 had leapt 36bp wider, closing at 233bp -- one of the biggest moves seen in a while. The Hang Seng Index sank 912.22 points, or 4.85%, to close at 17,911.95.
At 7pm, investors got the message: "Due to volatile market conditions, deal postponed."
According to one person familiar with the deal, it was thought prudent to wait for another time to tap the market. "We felt it was best for Khazanah not to tap the market now. They don't need the money. They are doing this deal because they want to promote Islamic financing and do a landmark transaction. But now is not the right time -- even for a high-quality name like Khazanah," he said.
Although the order books were covered, he noted that investors were asking for a higher yield. Some of them had also received approvals to participate in the deal before the markets turned -- and were suggesting that the issuer postpone the offering. "We decided it was in the best interest of everyone, including investors, not to go ahead with the deal," the source added.
Khazanah’s sukuk was to be the first Islamic bond in the dim sum market and as such, investors' reception to the transaction was being closely watched. Prior to yesterday's sell-off, there were hopes that the deal would kick-start the interest from other borrowers.
“Khazanah’s sukuk could attract some Islamic investors from the Middle East, but most likely it will be local investors. It may pique the interest of some Chinese borrowers as it offers the chance to diversify their funding source,” Davide Barzilai, a partner at Norton Rose, said earlier this week.
“However, I don’t expect a flood of dim sum sukuks. I expect it will still remain a niche product. Khazanah wants to promote Islamic financing and it also has investments in China, but it is one of the few Islamic investment companies that have significant investments in China,” Barzilai added.
Khazanah's decision to postpone its dim sum sukuk is yet another disappointment for Hong Kong's sukuk market, which has largely failed to take off.
Better luck for BSH
Meanwhile, BSH Bosch und Siemens Hausgeräte (BSH) had better luck with the timing and managed to get its debut Rmb2 billion dim sum bond away on Wednesday, before markets tanked. BSH is jointly owned by Siemens and Robert Bosch GmbH. It is one of the leading global manufacturers of household appliances with total sales €9.1 billion in 2010.
The bond was split into three tranches – a Rmb850 million three-year piece, a Rmb750 million five-year piece and a Rmb400 million seven-year piece. BSH priced the three-year bond at 2.375%, at the tight end of the 2.375% to 2.50% range. The five-year bond priced at a yield of 3.375%, also at the tight end of a 3.375% to 3.50% range. The company also added a seven-year tranche -- which paid a yield of 4% -- based on interest from a small club of investors. Deutsche Bank and HSBC were joint bookrunners.
The bonds were bought by “buy and hold” investors, and were hovering at the par issue price in the secondary market, according to one person familiar with the deal.
China is BSH’s second-largest market by sales and the proceeds from the dim sum bond will fund its growth in China. The issuer received all the required approvals to raise and remit the funds onshore ahead of launch. This deal was BSH’s debut bond issue in any currency.
The deal attracted an order book of Rmb2.75 billion from 100 investors. Of the three-year tranche, Hong Kong investors were allocated 59%, European investors 25% and Singapore investors 16%. Fund managers bought 47%, private banks 37% and banks 16%.
Of the five-year tranche, Hong Kong investors were allocated 34%, European investors 29%, Singapore investors 21% and others 16%. Banks took 51%, fund managers 20%, insurance companies 18% and private banks 11%.
Elsewhere, Indian company Infrastructure Leasing & Financial Services (IL&FS) has mandated Deutsche Bank, Royal Bank of Scotland and UBS for a dim sum bond. IL&FS is expected to be the first Indian company to tap the dim sum market.
The Indian deal was originally mandated to Deutsche Bank and Morgan Stanley and both banks arranged investor meetings some time back. However, the latter was subsequently replaced by RBS and UBS as the company was said to have wanted much tighter pricing than what Morgan Stanley showed it.
Speculation is that IL&FS plans to issue its dim sum bond through an offshore entity, as Indian companies cannot issue renminbi-denominated bonds or take on renminbi loans at present.
“Currently, Indian companies cannot borrow in renminbi as the Reserve Bank of India (RBI) does not consider the renminbi to be a permitted currency," said Arvind Narayanan, senior vice president and head of sales, treasury & markets at DBS Bank, India.
"However, the government has recently announced that Indian corporates will be allowed to borrow in renminbi for raising external commercial borrowings (ECB), subject to a limit of $1 billion within the existing ECB ceiling. Such borrowings shall be allowed only through approval route. However, this will only take effect once the RBI provides notification – which we expect in the coming weeks,” he added.
In the dollar bond space, Indonesia's state-owned electric utility company PT Perusahaan Listrik Negara (PLN) has mandated Barclays Capital and Citi as joint arrangers for its $2 billion global medium-term note programme. The leads are organising a series of global fixed-income meetings starting on September 27. A transaction may be launched after the investor meetings have been completed, subject to market conditions.
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