Malaysia prints $2 billion global sukuk

Malaysia priced a $2 billion dual-tranche global sukuk early yesterday morning despite tremendous market volatility.

Most Asian borrowers have been scared away from the dollar markets during the past two weeks, so it took some courage for the sovereign to launch such a large deal — its biggest global bond to date.

The team kicked off roadshows last Thursday, covering Kuala Lumpur, Hong Kong, Singapore, Abu Dhabi, Dubai, Riyadh, London and New York, and launched the transaction on Tuesday.

Given the problems elsewhere in the world, investors clamoured for this rare opportunity to buy exposure to Malaysia, which is a strong investment-grade credit (rated A3 by Moody’s and A- by S&P) and a relative safe haven.

In total, 320 global investors placed $9 billion worth of orders, with strong support from Middle Eastern and Malaysian investors. The sovereign has no plans to issue conventional bonds, which also helped to create non-Islamic demand for the sukuk — foreign investors have no other way to get their hands on Malaysia’s bonds.

“Markets have been fragile and we’ve seen zero out of the dollar space,” said one person familiar with the deal. “This deal got done because it’s Malaysian credit, and it’s a sukuk.”

The leads — CIMB, Citi, HSBC and Maybank — built up a shadow book with orders from Middle Eastern and Malaysian banks and funds, which gave them comfort in launching a deal on Tuesday.

The $1.2 billion five-year bonds priced at Treasuries plus 145bp to yield 2.991% and the $800 million 10-year bonds priced at Treasuries plus 165bp to yield 4.646%.

Malaysia achieved its lowest-ever yields on a dollar sukuk with this deal, which is its third global Islamic bond and its first in the 10-year space.

The bonds priced at the tight end of final guidance — Treasuries plus 145bp to 155bp on the five-year and Treasuries plus 165bp to 175bp on the 10-year — and about 15bp inside the initial guidance.

The five-year tranche attracted an order book of $5 billion. Middle Eastern investors piled into the five-year tranche, buying 43% of the deal. Malaysian investors bought 26%, Asian investors (excluding Malaysia) 18%, European investors 9% and US investors 4%.

The 10-year bond attracted a $4 billion book. Malaysian investors bought 28%, Asian investors (excluding Malaysia) 29%, European investors 21%, US investors 15% and Middle Eastern investors bought only 7%.

“Malaysia wanted to raise $2 billion and by offering two tranches, we were able to raise that amount,” said the person familiar with the deal. “Middle East investors tend to be take-and-hold investors. But they rarely buy bonds beyond five years. US investors on the other hand prefer the 10-year bonds.”

The bonds traded 5bp tighter in secondary trading, he said, with the new Malaysia 2016s quoted at Treasuries plus 140bp and the Malaysia 2021s quoted at 160bp over Treasuries in the morning yesterday.

A banker away from the deal said the five-year bonds traded to as tight as Treasuries plus 133bp before backing up to 139bp, while the 2021s traded to Treasuries plus 153bp before backing up to 162bp.

The Malaysia May 2015s traded at around Treasuries plus 115bp while the deal was in the market, but those bonds are very illiquid — and it is difficult for investors to buy. Based on those levels, the new 2016s priced about 15bp through the implied secondary curve.

The sukuk was issued through a special purpose vehicle, Wakala Global Sukuk. This is Malaysia’s first sukuk to be offered under the wakala structure, which is a combination of leasable assets, shares and commodities.

“The successful pricing of the Wakala Global Sukuk amidst the current volatile and challenging global market environment is a remarkable testament of Malaysia’s strong macroeconomic fundamentals,” said Malaysia’s finance ministry in a release. “The deal was priced at the tighter end of the revised price guidance reflecting investor confidence in the Malaysian credit story.”

Malaysia’s official foreign exchange reserves stood at $32.7 billion or more than four times its short-term external debt as of end May 2011. The bonds mature on July 6, 2016 and July 6, 2021.