The government of Malaysia priced a $1.5 billion dual-tranche Islamic bond early on Thursday amid fears that the oil exporting sovereign could lose its A rating in the coming months.
With a A3/A- rating, the Reg S/144A Islamic bond — also known as a sukuk — was split into a $1 billion 10-year tranche and $500 million 30-year offering, according to a term sheet seen by FinanceAsia.
The 10-year note priced at US Treasuries plus 115 basis points, which is 20bp tighter than its initial price guidance area, while the 30-year bond priced at Treasuries plus 170bp, 15bp tighter than the initial guidance area.
Total orderbooks for the sovereign's dual-tranche note — its first since 2011 — reached $9 billion from around 450 accounts, said a source close to the deal.
Malaysia Sovereign Sukuk, a special-purpose vehicle, sold the Islamic notes, which fall under a wakala agreement — a contract whereby a party authorises another party (the SPV) to act on its behalf based on agreed terms and conditions.
Under this arrangement the issuer will enter into an asset sale and purchase agreement for not less than 26% of the issued amount and the other 26% will be used to service the periodic payments or coupon of the Islamic bond, according to a source familiar with the matter.
The arrangement also includes a murabaha agreement — essentially a sale financing agreement — for not more than 48% of the issued amount with Malaysia, added the source.
The sale of the Islamic bond comes amid challenging times. Malaysia has been going through a rough patch, with its fiscal position weakening due to mounting debt and lower oil prices.
Malaysia’s federal government debt stood at 54.5% of GDP by end-2014, breaching the median of 50% for an A rating, according to Fitch Ratings.
Fitch, which placed the Southeast Asian nation's A- credit rating on a negative outlook in July 2013, said in its March 18 Sovereign Credit Briefing in Hong Kong that the probability of a downgrade in the next 12 to 18 months has risen to over 50%.
The steep drop in international oil prices since June 2014 — which has seen the price of crude oil fall by more than 50% — has given bondholders reason to worry. Petroleum accounts for roughly 30% of Malaysian fiscal revenues.
At a budget meeting on January 20, Kuala Lumpur was forced to cut its 2015 GDP growth forecast range to 4.5%-5.5% from 5%-6%. The government also raised the nation’s annual deficit target to 3.2% of GDP from 3%.
Despite Malaysia’s mounting economic challenges, local rating agency RAM Ratings anticipates new global sukuk issuance to remain fairly resilient in 2015, with the Southeast Asian nation contributing 60% to 70% of total supply.
Global sukuk volumes are likely to touch $100 billion to $120 billion this year despite the challenging environment for Malaysia and the Gulf Cooperation Council, the rating agency said in a report on Wednesday. The expected volumes are close to 2014’s annual supply of $116.23 billion.
Such growth will only be fuelled if the transaction requirements — funding and other related costs — for sukuk are comparable to those of conventional bonds, Promod Dass, deputy chief executive officer at RAM, said.
"This commercial equilibrium between sukuk and conventional bonds, if achieved, will give sukuk the staying power to eventually evolve into a mainstream global financial instrument," he said.
The last Asian issuer to raise a global sukuk was Malaysian state oil company Petronas. In March, the firm sold the region’s second-biggest corporate dollar bond, raising a $5 billion multi-tranche bond with $1.25 billion of it belonging to a five-year Islamic bond.
The proceeds of Malaysia’s latest sukuk issuance will be used to redeem $1.25 billion of Islamic trust certificates due this year as well as for general purposes.
In terms of comparables there is Malaysian state oil firm Petronas’s recent issuance. In late Wednesday trade, it’s outstanding 2025 and 2045 bonds traded at a yield-to-maturity of 3.175% and 4.301%, respectively, or a cash price of 102.741 and 103.321, according to Bloomberg bond data.
Malaysia also has an outstanding $800 million 10-year bond that expires in 2021 that traded at a yield-to-maturity of 2.769% or a cash price of 110.641.
For the 10-year tranche, Malaysian investors subscribed to 28% of the notes, followed by Asia ex-Malaysia with 22%, Europe ex-Middle East 16%, Middle East 25% and USA 10%. Fund managers purchased 34% of the notes, followed by sovereigns, central banks and supranationals with 27%, banks 23%, pension funds 12%, insurers 3% and private banks 1%.
As for the 30-year tranche, Asia ex-Malaysia investors subscribed to 35% of the offering, followed by USA 29%, Europe ex-Middle East 19%, Malaysia 15% and Middle East 2%. Fund managers purchased 45% of notes, insurers 17%, sovereigns, central banks and supranationals 17%, pension funds 12%, banks 5% and private banks 4%.
CIMB, HSBC, and Standard Chartered are joint bookrunners on the deal.