The Federation of Malaysia set its mark on the world of Islamic finance yesterday (Tuesday) with the completion of the world's first Islamic global bond issue. The government achieved all of its objectives with the five-year Shariah compliant issue, which managed to penetrate a new investor base while still maintaining balanced distribution between liquidity and buy and hold investors.
The lead manager also deserves plaudits for its pioneering efforts and ability to manage market expectations with a strategy that saw it launch a relatively small deal size then build up as the transaction gathered momentum. Even the unexpected announcement and subsequent retraction of prime minister, Mahathir Mohamed's decision to resign over the weekend failed to stop the deal in its tracks, with books closing at the $1.1 billion mark.
The global pool of Islamic funds is now believed to top the $200 billion mark, but at the outset few would have confidently predicted a runaway success given that virtually none of these accounts had purchased a bond issue before.
Yet the 144a offering in the name of Malaysia Global Sukuk was upsized from $350 million to the full $600 million permitted under its filing. Pricing also came at the tightest end of a 95bp to 98bp range over Libor on an issue price of par and will be listed in both Labuan and Luxembourg.
Alongside the lead, there were three Asian co-managers numbering Bank Islam, Maybank and Standard Chartered, plus five Middle Eastern co-managers comprising ABC Islamic Bank, Abu Dhabi Islamic Bank, Dubai Islamic Bank and the Islamic Development Bank.
In total, 51 investors were counted in the book, of which 27 were new to the Malaysian credit. In terms of volume, the new investors were said to account for about 65% of the overall deal, with three accounts (including one from the Middle East) placing orders for over $100 million.
Unsurprisingly the floating rate structure appealed heavily to banks and by investor type, the book split 75% banks and 25% asset managers.
By geography, the deal achieved an even split with about 50% of paper placed in the Middle East, followed by 30% to Asia of which about half was placed to Labuan-based institutions, 16% Europe and 4% the US. Middle Eastern investors were similarly said to be well spread following a four-city roadshow, with final participation from accounts in Abu Dhabi, Bahrain, Kuwait, Iran, Pakistan, Qatar and Saudi Arabia.
For the lead one of the prime objectives was to make sure the deal was carefully syndicated. On the one hand, HSBC needed to make sure that Middle Eastern based accounts, which are most likely to just let the paper sit in their portfolios, did not rob the deal of all its liquidity. On the other, bankers also needed to make sure that Malaysia's traditional buyers participated and felt comfortable about the deal's secondary market trading.
In terms of pricing, the deal came flat to the sovereign's theoretical credit curve. Since the government is extremely keen to develop an international Islamic bond market, success in pricing such an unusual structure without the need for a premium, is likely to encourage greater use of Islamic bonds for general funding purposes in the future.
At the time of pricing, the sovereign's benchmark June 2009 bond was being quoted over a 10-year Treasury to yield 115bp over Treasuries or 106bp over Libor. Its other benchmark July 2011 issue was likewise being quoted over a 10-year and trading at 180bp over Treasuries or 133bp over Libor.
The greater liquidity of the 2011 issue means that it was the hardest hit by the market's nervousness over the succession issue. At one point during Monday's trading in Asia, for example, the deal widened as far as 203bp over Treasuries before recovering 25bp after Moody's unexpectedly placed the sovereign's Baa2 credit on review for possible upgrade. Net net, the 2009 finished roadshows about 10bp wider, while the 2011 was 30bp out.
Nevertheless, the rating agency's action proved a saviour to sovereign spreads and the deal's eventual pricing, although greater clarity about Mahathir's succession would probably have stabilized the market just ahead of pricing anyway. "It was important to wait and make sure there were no curve balls," says one observer. "As it is the succession looks fairly orderly. Mahathir will stay on until at least October 2003, while the current deputy prime minister, Badawi will take on more and more duties."
Longer term, many houses still have a buy recommendation on Malaysian bonds supported by the positive fundamentals which prompted Moody's move. Standard & Poor's also has the sovereign's BBB credit on positive outlook.
Under Shariah law, the receipt and payment of interest is forbidden. In order to structure a deal which worked under these conditions, the borrower purchased properties from the country's Federal Land Commissioner for a five-year duration and held the properties in trust via an SPV.
This SPV in turn leased the properties to the government, which issued floating rate trust certificates (sukuk) to investors with pricing referenced against the sovereign's credit curve rather than the value of the property assets. The lease rental payments from the government to the SPV, exactly matches the payments payable on the trust certificates.
At the expiry of the purchase agreement after five-years, the government will buy back the properties at the face value of the bond, so that any rise or fall in the valuation of the underlying assets will have no bearing on the bond issue. These underlying assets comprise four government-owned properties including the Ministry of Finance building, two hospitals and civil service accommodation.
