Khazanah, Malaysia’s state-owned investment fund, sold a $500 million chunk of its stake in power producer Tenaga Nasional on Wednesday evening through a zero-coupon exchangeable sukuk.
The trade is a re-launch of a June deal, led by JP Morgan and Nomura, that Khazanah pulled after failing to get the price it wanted. That deal was a five-year bullet structure but CIMB, Deutsche Bank and Standard Chartered took charge this time around and opted for a seven-year maturity and four-year investor put — or “certificateholder optional dissolution” in the parlance of Islamic exchangeables.
In other words, investors got the put one year earlier than under the original structure and there is also an extra two years of equity optionality. This structure helped it to achieve a conversion premium of 15% and a slight negative yield of -0.05%, which was in line with the pricing it was aiming for with the first deal.
There was only just enough demand to achieve this pricing though and Khazanah could not exercise its $100 million upsize option.
The deal is part of Khazanah’s continuing effort to promote Malaysia as a financial centre for the Islamic world, although sharia exchangeables are generally bought by the same group of investors who buy regular equity-linked deals — outright funds in Europe and hedge funds in Asia, for the most part.
As with most Islamic finance deals, the main difference from an investor’s point of view is the use of a few Arabic words to describe conventional terms and concepts. Even pricing is now in line with conventional deals.
However, some differences remain. New rules in the EU aimed at restricting the marketing of Islamic deals to retail investors have had the effect of closing primary issuance even to the institutional buyers of equity-linked bonds in countries such as France and Germany.
Even so, big funds in the UK and Switzerland can still take part, and eurozone funds can get involved in secondary trading so pricing was unaffected, according to a banking source.
The deal also faced some more familiar challenges. Malaysia’s stock market is open until 5pm, which meant a late start to the marketing effort. It also meant that some other deals got to the market sooner, including a €400 million deal from Deutsche Wohnen, a blue-chip German property developer.
Books on the Tenaga bond stayed open until 10.30pm local time and the deal was finally allocated in the small hours of the morning.
The deal was marketed with a credit spread of 120bp and stock was available to borrow at 25bp, up to at least 60% of the deal size. Stock slippage was assumed at 2% and there was also $100 million of asset swaps.
Unusually, investors priced the implied volatility at roughly 17% to 19%, which is a premium to Tenaga’s 100-day volatility of just 10%, suggesting that investors see considerable upside in the stock.
Khazanah has made something of a specialty of these types of deals, having sold an Islamic exchangeable bond in each of the past three years, with previous sukuk monetising its stakes in Parkson and IHH.
One banking source familiar with Khazanah said that these deals were not primarily motivated by fund-raising or its fundamental view on the equity, but were chiefly about helping the government to promote Malaysia as a centre for Islamic finance. Indeed, Khazanah owns roughly one-third of Tenaga — a stake that is worth roughly $7 billion.