Khazanah returns with $399m exchangeable sukuk

Malaysian state fund continues its track record of regular sukuk issuance, printing yet another bond exchangeable into shares of Beijing Enterprises Water Group.

Khazanah Nasional kept up its practise of monetising its stockholdings through the equity-linked route on Wednesday by raising $399 million through the sale of a zero-coupon exchangeable sukuk exchangeable into Beijing Enterprises Water Group shares.

As part of its ongoing effort to promote Malaysia as a financial hub for the Islamic community, it has become a routine for Khazanah to cash out part of its stock portfolio through the exchangeable route every one or two years. These repeated issues help develop a pool of Shariah-compliant products and also set benchmarks for other institutions.

Khazanah generally tends to choose Malaysian and Hong Kong stocks as the underlying equities for the exchangeable sukuk. The rationale is clear – local stocks are well known domestically while Hong Kong stocks are highly liquid, which can ensure good trading flow in the secondary market.

In recent years Khazanah has also issued bonds exchangeable into the shares of Malaysia’s Tenaga Nasional, IHH Healthcare, and Plus Expressways, as well as Hong Kong-listed Parkson Retail Group.

Wednesday's deal with Hong Kong-listed Beijing Enterprises Water should provide some comfort to equity-linked bankers since Khazanah has more recently chosen to sell shares directly through discounted block trades. In May it sold $201 million in IHH shares through an accelerated bookbuild offering and it did the same with Tenaga last year. 

Given Khazanah’s quasi-sovereign credit, almost all of its previous exchangeable sukuk were done with double zero structures (zero coupon and zero yield). Yet bankers said Khazanah had been even more aggressive in terms of pricing structure recently, and had been able to achieve negative yields for both IHH in 2013 and Tenaga Nasional in 2014.

This time round, it appears that Khazanah has loosened its grip a bit by reversing to a double zero deal for Beijing Enterprises Water Group, a water treatment company controlled by the Beijing municipal government and listed in Hong Kong.


In an unusual move, Khazanah also offered a certain degree of flexibility by launching the deal at $396 million to $415 million, although technically it could be regarded as a $396 million base deal with a $19 million greenshoe option.

The sukuk, which is officially known as exchangeable trust certificates, has a standard five-year, three-year put structure with full dividend protection.

The comparatively cheap pricing was offset by a steep exchange premium of 42% to 49% to the stock’s HK$5.41 Tuesday close. Even at the investor-friendly end it would have translated into an exchange price level that Beijing Enterprises Water has never reached since 2000.

Still, some fund management sources said the deal was attractive because of the highly liquid nature of the underlying stock, which has traded at a daily average amount of $12 million over the last three months.

As such, some may argue that it was not essential for the leads to provide stock borrow to back up the deal, although one of the sources said it was necessary because street borrow was expensive at around 250 basis points.

By comparison the leads provided stock borrow at 50bp amounting to 75% of the deal.

Such stock borrow helped to attract about $800 million-worth of demand from both outright and hedge funds, with allocations made to about 30 accounts, according to one source. 

The final terms mostly settled near the best-end for investors, including final deal size at $398.8 million and 43% exchange premium, resulting in a HK$7.7363 final exchange price.

The underlying assumptions include a 92% bond floor and an implied volatility of around 28% based on a credit spread of 140bp and a 50bp stock borrow cost.

Bank of America Merrill Lynch and CIMB, which provided the stock borrow facility, and Deutsche Bank were joint bookrunners of the transaction.

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