Deutsche leads Islamic bond for Malaysian toll operator

A successful bond issue for toll-road operator Silk sets a new benchmark in Islamic finance.
Deutsche Bank has placed a M$2.01 billion ($530 million) Islamic bond issue for Sistem Lingkaran Lebuhraya Kajang (Silk), a Malaysian toll road operator. In addition to Deutsche's role as lead manager and sole book runner, Alliance Bank Malaysia and Bank Islam Malaysia served as co-leads.

Aside from being a significantly sized issue for the Islamic debt market, the Silk deal is also the biggest single-A rated bond deal ever to be launched in Malaysia.

"The offering sets a new benchmark in terms of tenor and size for a ringgit debt deal with its credit rating," says Sikander Kanji, head of Asia global markets at Deutsche. "This represents a positive development for investor credit confidence and liquidity in this credit segment of the domestic bond market."

The deal was separated into 15 tranches with maturities ranging from six to 20 years. It was fully subscribed with 44% of the notes sold to insurance companies, 33% to banks, 12% to pension funds as well as an 11% pick up from asset managers.

As expected with this type of deal, most of the interest came from Islamic financial institutions, but commercial institutions also took 30% of the paper, according to a Deutsche official. The banker added that all the bonds were sold to Malaysian accounts.

Even though Islamic debt financing is by no means a new concept, there is often a degree of ignorance about what it is and how it prices against straightforward corporate deals with the same rating. This is because, unlike corporate bonds, Islamic bonds carry a zero coupon, because interest payments are banned under Islamic law. Investors are enticed instead by receiving a share of the profits from the deal.

"In terms of costs difference, Islamic bond investors know how much they will get because the profits are fixed when they buy the deal," explains Kuah Hun Liang, executive director for Deutsche's Malaysian operations. "They can compare what they get from both types of issue so there really isn't that much of a difference between the cost of Islamic debt and normal corporate debt."

Silk is a subsidiary of Sunway Holdings, a construction group with interests in concrete, properties and hotels. Proceeds from the transaction will be used to partly finance the design and construction of a 37-kilometer express ring road linking towns in the southern corridor of Kuala Lumpur.

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