Mexim prices 2014’s first dollar sukuk

The $300 million five-year sukuk achieved a pricing tighter than fair value when compared to the company's conventional note.

Malaysia Export-Import Bank (Mexim) sold the world’s first international sukuk of the year on Monday, pricing its maiden Islamic note inside its existing conventional bond’s curve.

Mexim’s $300 million five-year sukuk achieved a pricing tighter than fair value when compared to its conventional note – an accomplishment rarely seen for first time issuers especially in the Islamic bond space.

The Reg S-registered Islamic bond – which is also the world's first from an Exim bank – achieved a final pricing of 140bp over Treasuries, which was 25bp tighter than its initial price guidance of 165bp over Treasuries, according to a term sheet.

The bank’s existing conventional five-year notes expiring in 2017 were used as comparables. They were trading at Treasuries plus 200bp at time of pricing, which is a Z-spread of about 120bp. A Z-spread – also known as a zero-volatility spread – measures the spread that the investor will receive over the entire US Treasury spot rate curve. 

After adjusting for the curve, fair value for a conventional bond should be around 136bp to 141bp above Treasuries, highlights a source close to the deal.

The fact that Mexim managed to price its sukuk inside its conventional curve is an indication that there is good demand for creditworthy issuers from emerging markets, even for shariah-compliant structures. The note has a coupon of 2.874%.

“There is certainly more going on in the structure of a sukuk and some investors tend to apply the need for additional premium for that exercise,” said the source. “But Mexim priced very significantly inside where fair value should sit for a sukuk transaction.”

This is usually not the case for Islamic bond transactions, note syndicate bankers. For example, the Republic of Indonesia’s existing 2022s – which are conventional notes – were trading at a Z-spread of 272bp at time of pricing, while its sukuks were trading at a Z-spread of 304bp, clearly indicating that there is typically some premium demanded for paper structured in the latter format.

Additionally, unlike conventional issuances, sukuks are excluded from the Emerging Market Bond Index (EMBI). “A lot of investors follow that index and it provides a very natural bid,” said a Hong Kong-based syndicate banker. “Typically the premium for not having the index is around 10bp.”

Strong order book

Mexim’s sukuk transaction achieved an order book of $3.2 billion from 185 accounts, according to a term sheet.

Asia ex-Malaysia investors subscribed to half of the trade bank’s paper, followed by Middle Eastern investors with 19%, European 16% and the rest to Malaysian investors.

“The Middle East proportion is pretty high and we are quite happy with seeing such a good take up by Middle Eastern investors despite them not necessarily having seen this name come in sukuk format before,” said a source.

Fund managers and hedge funds bought 42% of the notes, followed by financial institutions and private banks with 30%, central banks and sovereign wealth funds with 16%, insurance and pension funds 10% and others 2%.

The demand and supply for these shariah-compliant products will continue to grow. The market will be supported by stabilising or improving investment projections in key economies like Malaysia, according to Standard & Poor's (S&P) in a report published on February 5. 

Also, Malaysia already benefits from a broad sukuk investor base and liquid debt market. So the increased interest from both issuers and investors, notably Middle East and Asia in the Malaysian ringgit and US dollar market should increase, adds the rating agency.

"Total issuance will exceed $100 billion for the third year in a row if yields remain attractive for issuers," wrote Samira Mensah, credit analyst at S&P in the report. "And, after weakening in 2013, we believe issuance could pick up again in Malaysia in 2014 as its investment programme resumes."

Mexim’s bonds are trading at Treasuries plus 130bp in secondary markets, which is 10bp tighter than when it issued. The notes are issued under its $1 billion multi-currency sukuk programme established through Exim Sukuk Malaysia Berhad.

BNP Paribas, CIMB, HSBC and Maybank were joint bookrunners of the A3/A- rated deal.

Agile Property’s bond

Elsewhere in the Asia ex-Japan G3 space, Agile Property Holdings issued a $500 million five year bond with a callable option in the third year on Monday – the first Chinese developer to hit markets in more than two weeks.

Agile braved volatile conditions by issuing its first senior fixed-rated bond since 2012 after an emerging market selloff last week – particularly in the Mainland property space due to overwhelming supply in January. But the developer enticed investors by offering a fairly modest new issue premium of 9bp.

The high-yield note ended up pricing at 8.5%, tightening slightly from an initial price guidance of 8.75% area, according to a term sheet.

“The fact that they were able to boast the size of transaction at $500 million and also tighten guidance is very much a testament to the strength of their credit – they’ve obviously been in the market for a very long time and have a very strong following – and the fact that investors are willing to buy the right names at the right levels from the emerging market land,” said a source close to the deal.

Agile’s transaction achieved an order book of $1.85 billion from 168 accounts, and is trading at about par to its reoffer price of 99.499 in secondary markets.

The last Chinese property developer to come to market was Wanda Properties on January 23, when it priced a $600 million 10-year note at a yield of 7.39%, according to Dealogic data.

HSBC and Standard Chartered were the global coordinators and joint bookrunners of Agile’s deal. Other bookrunners include Agricultural Bank of China (ABC) Hong Kong branch, ABC International, ICBC Asia, ICBC International, JPMorgan and Morgan Stanley.


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