Roadshows for the pioneering issue are provisionally scheduled to begin in Hong Kong on Friday before moving to Europe and the Middle East next week, then back to Asia for pricing the middle of the week beginning June 24.
During 2001, about 60% of debt raised in Malaysia's domestic bond market was Shariah-compliant and the sovereign is said to view the forthcoming issue as a next logical step in its bid to develop a wider market for Islamic debt. However, the deal has also been structured to appeal to the sovereign's traditional investor base as well and should the issue size start to approach the $500 million mark, it will be included in most of Asia's benchmark debt indices.
In order to appeal to the widest investor base, the lead appears to have worked hard to keep the structure as clean and simple as possible. Therefore, despite the fact that an SPV and pool of property assets give the deal the appearance of a securitization, it is in essence straight vanilla debt. Pricing will be determined as a spread to six-month Libor and solely based on the sovereign's credit strength, with no reference to property prices, yields, or any other aspect of the asset pool.
The property assets are only there to get the structure round the founding principle of Shariah law, which forbids the receipt or payment of interest. Indeed, a strict interpretation of the law states that even if a company is engaged in a business sector deemed ethical (halal) such as textiles, for example, it is not supposed to deposit surplus funds in an interest bearing account, or borrow money with interest. Should it be found to be doing so, then fund managers guided by Shariah principles are fully expected to express their displeasure by raising their voices against such acts at the Annual General Meeting.
In this instance, the use of a property-based SPV means that the issuer is not technically paying any form of interest, while investors technically benefit from the performance of an underlying asset. The SPV - Malaysia Global Sukuk Inc - buys five properties from the government's Federal Land Commissioner (FLC) and then leases them back to the government for a set period. This lease has no reference to the performance of the property pool, but because payment is completed in the form of a lease rather than a coupon, it means that Islamic investors will feel comfortable purchasing the offering.
At the expiry of the purchase agreement, the government will buy back the properties at the face value of the bond issue, so that any potential rise or fall in the valuation of the underlying assets will have no bearing on the bond issue. The five properties in question also have to be "clean" properties, meaning they cannot be hotels (gambling), brothels (sex), vineyards (alcohol), or pig farms (pork). One of the five is believed to be the Ministry of Finance building in Kuala Lumpur.
Because a deal of this nature has never been attempted in the international markets before, there are no sure-fire guarantees of success. However, the transaction does have two key factors in its favour.
The first is that the global pool of Islamic funds now tops the $200 billion mark and in the debt markets, there is very little for accounts to invest in - most issues are small, illiquid and short-dated. The second is the strength of the Malaysian sovereign credit and opportunity for stable risk diversification the BBB-rated deal will offer Middle Eastern-based accounts.
From Malaysia's point of view, the government is said to be keen to widen its investor base and will consequently try and limit the amount of paper placed with Labuan-based banks. However, given that these banks will provide a natural back-stop bid in the secondary market, it seems possible that the deal may price very close to the existing sovereign curve.
Because the deal has a Libor-based structure, it is expected to appeal most heavily to bank investors and in this respect should be cheaper to own than any of the sovereign's other bonds, which have to be bought on an asset swap basis.
Although the maturity of the new deal remains flexible, the most important pricing points will be the sovereign's outstanding 8.75% June 2009 and 7.5% July 2011 bonds. The former is currently said to be trading at about 115bp over Libor on the bid side and the latter at about 120bp over.