Sukuk : A Viable Funding Option

Sukuk : A Viable Funding Option
HIGH-LEVEL WORKSHOP ON SUKUK Moscow, Russia 15-17 December 2014 Presented by: Arshad Ismail

CONTENT SECTION INTRODUCTION TO ISLAMIC CAPITAL MARKETS SUKUK
PART I : OVERVIEW PART II : DEVELOPING THE SUKUK MARKET PART III : STRUCTURING ANALYSIS PART IV : COMMON SUKUK STRUCTURES PART V : GLOBAL MARKET TRENDS PART VI : MALAYSIA AS CROSS BORDER SUKUK MARKETPLACE SELECTED SUKUK TRANSACTION HIGHLIGHTS 2

Introduction to Islamic Capital Markets

Financial services based on riba (interest)
What are Islamic Capital Markets? Shariah essentially allows all economic activities unless clearly prohibited Islamic Capital Markets operate in line with Shariah principles. Shariah is basically Islamic law that is derived primarily from the Quran and Sunnah. Shariah essentially allows all economic activities unless there is a clear prohibition. The prohibited activities include:- The legal relationships in Islamic finance are NOT about “LENDING” and “BORROWING” but instead about trade and/or equity participation including “SALE”, “PURCHASE”, “LEASE”, “CONSTRUCTION”, “INVESTMENT”, “AGENCY” and “PARTNERSHIP”. Financial services based on riba (interest) Gambling and gaming which are not permitted by Shariah Manufacture or sale of non-halal prohibited commodities Conventional insurance Entertainment activities which are not permitted by Shariah Stock-broking or share trading in securities not approved by Shariah 4

PARTNERSHIP CONTRACTS SALE AND PURCHASE CONTRACTS
What are Shariah Principles? Shariah principles form the basis of Shariah-compliant financial transactions Various products are available in the Islamic Capital Markets including Shariah-compliant equities, Sukuk, unit trusts, Shariah indices, exchange traded funds and crude palm oil futures contracts. The products can be structured based on one or more Shariah principles: LEASE CONTRACT AGENCY CONTRACT IJARAH (Leasing) WAKALAH BIL ISTITHMAR (Investment Agency) PARTNERSHIP CONTRACTS SALE AND PURCHASE CONTRACTS IJARAH (Leasing) MURABAHAH (Cost Plus Sale) ISTISNA’ (Purchase Order) WAKALAH BIL ISTITHMAR (Agency Contract) MUDHARABAH (Profit-Sharing) MUSHARAKAH (Joint Ventures) MUDHARABAH (Profit-Sharing) MUSHARAKAH (Joint Ventures) MURABAHAH (Cost Plus Sale) ISTISNA’ (Purchase Order) Contract whereby a lessor leases out its asset to a lessee at an agreed rental fee and predetermined lease period. The ownership of the leased asset remains in the hands of the lessor. Contract for a sale and purchase of an asset. Cost and profit margin are made known upfront and agreed by the parties involved. Contract for a sale and purchase of an asset to be delivered in the future. Buyer will require a contractor or seller to construct or deliver the asset in the future. Settlement can be delayed or arranged based on schedule agreed by the partied involved. Contract which involves a principal (fund provider) appoints an agent (Wakeel) to invest funds provided by the principal into Shariah compliant investments or assets and the Wakeel provides its expertise in managing those investments on behalf of the principal for a particular duration, in order to generate return. Contract made between 2 parties to enter into a venture wherein one party provide the capital (capital provider or Rab al maal) and another party will manage the venture (entrepreneur or mudarib) Profit to be distributed based on a pre-agreed ratio between the capital provider and the entrepreneur, while losses solely borne by the capital provider. Partnership between 2 parties or more to participate in a business venture Parties contribute capital in the form of cash or in kind. Profit will be distributed based on a pre-agreed ratio amongst the partners. Loss is shared on the basis of capital contribution.

Sukuk PART I : OVERVIEW

What are Sukuk? Bonds are financial obligations arising from conventional borrowing and lending, whereas Sukuk represent ownership/interest in an asset Sukuk have various definitions depending on jurisdiction including: “A document or certificate which represents the value of an asset.” – Securities Commission Malaysia “An Islamic investment certificate which represents an undivided beneficial ownership of an underlying asset…which grants investors a share of an asset along with the cash flows and risk commensurate with such ownership.” – Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Regardless of the jurisdiction or technical definition, the concept of Sukuk is universal and differs from a conventional bond in the following respects: Features Sukuk Conventional Bonds Issuer Issuer’s principal activities or the use of proceeds must not contradict Shariah No restriction Approvals Must be approved by the relevant regulatory body and Shariah Adviser. In certain jurisdictions, together with the Shariah regulatory body Must be approved by the relevant regulatory body Form Based on trade transaction, represented by sale, lease, investment or joint venture contracts Based on model of borrowing/lending

What are Sukuk? (Cont’d)
Features Sukuk Conventional Bonds Utilisation of Proceeds Should not contradict Shariah No restriction Asset requirement Yes Typically no, except for Asset Backed Securities and secured transactions Security Can be structured as clean or secured Credit Enhancement / Ring-fencing Can be included as features of both instruments Use of Special Purpose Vehicle (SPV) as issuing conduit Required under selected structures to facilitate the underlying Shariah contracts and target investors Typically not required except for Asset Backed Securities transactions when bankruptcy remoteness is required Exposure to Bigger Market Sukuk enjoy a wider investor base from both sets of investors – Islamic & conventional, thereby maximizing demand for the securities Sukuk may also lead to better profiling/exposure for issuers and enhance their credit profile in new markets Conventional bonds are not acceptable to Islamic investors. As such, limited exposure to conventional investors only

What are Sukuk? (Cont’d)
Features Sukuk Conventional Bonds Programme/ Issuance Cost Lead Manager/Lead Arranger fees are similar to conventional bonds transactions Documentation costs could be marginally higher Shariah Advisory fee No additional Shariah Advisory Fee Documentation In addition to the common issue documents, additional documents to evidence the Islamic transactions Common issue documents such as Programme Agreement/ Facility Agreement, Subscription Agreement, etc Tax Incentives (in Malaysia) Tax deductibility on issuance expenses for selected structures: Ijarah and Wakalah No tax incentives on issuance expenses Risk Both conventional bonds and Sukuk are exposed to credit risk and market risk

Potential pricing competitiveness vis-a-vis conventional bonds
Why Sukuk? Key Advantages of Issuing Sukuk To tap into a new and wider investor base (Islamic and conventional funds) Potential pricing competitiveness vis-a-vis conventional bonds Diversification of investors Alternative source of funding - Provides issuers option to tap a new funding source (in addition to the bank market and conventional fixed income investors) Tax Incentive in Malaysia – Tax deductibility on issuance expenses for selected structures

Sukuk PART II : DEVELOPING THE SUKUK MARKET

Creating a "level playing field" Regulation for Shariah Advisory
Developing the Sukuk Market Making Islamic Capital Markets effective, efficient and conducive Depending on a country’s existing regulations on capital market transactions and its legal and tax framework, the development of Sukuk in a new market would typically involve the following: Policy Principles What should be done? Creating a "level playing field" Sukuk structures typically involve purchase or lease of, or investment into, underlying assets which may attract tax and/or stamp duties, depending on the jurisdiction Regulators have to look at the economic substance of the Islamic financial transactions and make the necessary amendments to the tax legislation in order to ensure Sukuk will be at par with bonds Drawing on the Malaysian experience, all taxes, levies and duties that would otherwise be payable on the underlying transactions have been neutralised. Thereby placing Sukuk on a level paying field vis-à-vis bonds Also, profits/returns payable under Sukuk are treated similar to “interest” for tax purposes. Regulation for Shariah Advisory In Malaysia, the Shariah Advisory Council of Securities Commission Malaysia acts as the sole authoritative body to advise on Shariah matters pertaining to Islamic capital market products Alternatively, other jurisdictions including United Kingdom and Hong Kong have taken the approach to be guided by the resolutions of Shariah advisor(s) appointed for the respective Sukuk transactions

Developing the Sukuk Market (Cont’d)
Making Islamic Capital Markets effective, efficient and conducive Policy Principles What should be done? Evolving Regulatory Landscape The Islamic Finance industry is still growing and evolving, as such the regulatory framework in Malaysia does not encompass all known Islamic structures in the industry. Securities Commission Malaysia provides the flexibility to new Shariah structures which may not be covered under current regulations Broadening the Investor Base Broadening the local investors base is fundamental to create demand in investment into local Sukuk issuances by the government, government linked agencies, state owned enterprises and corporate Incentives to Encourage Growth of the Market In order to encourage growth of the Sukuk market in Malaysia, the government introduced incentives such as tax deduction/exemptions to issuers/investors in order to boost issuance of/investment in Sukuk e.g. no withholding tax for profit/coupon for non-resident investors under Malaysia’s Income Tax Act

Sukuk PART III : STRUCTURING ANALYSIS

Typical Terms and Conditions of a Reg S USD Sukuk Transaction
Structuring Sukuk Typical Terms and Conditions of a Reg S USD Sukuk Transaction Parameters Example Issuer Typically, a special purpose vehicle Facility Trust Certificates Programme Islamic Structure Including Musharakah, Ijarah, Wakalah or such other structure as advised by the Shariah Adviser Rating Ratings issued by international rating agencies namely, S&P’s, Moody’s and Fitch Utilisation of Proceeds Capital expenditure, general corporate purposes and working capital, all for purposes which do not contradict Shariah Mode of Issue Bought deal/Private Placement/Bookbuilding. International Sukuk transactions (Reg S/Rule 144A) are typically issued via bookbuilding Conditions Precedent Standard bond documentation conditions precedent including execution of legal documentation, regulatory approvals, and statutory documents Representations and Warranties Standard bond documentation representations and warranties including the issuer having the capacity to enter into the transactions, the issuer being in compliance with applicable laws and regulations, and not being in breach of the Transaction Documents Events of Default Including a default in payment obligations and a breach of any conditions of the Transaction Documents Positive Covenants Perform certain obligations including complying with all terms and conditions under the Transaction Documents, and with all applicable laws and regulations Negative Covenants Not do certain things e.g. amending its statutory documents which would be inconsistent with the Transaction Documents, reducing its issued and paid-up capital, and pledge or secure assets after the securities have been issued Information Covenants Including submission of audited accounts Transaction Documents Including but not limited to the Programme Agreement, Trust Deed and other asset related documents Governing Law English Law. Asset related documents are typically governed by local law 15

Execution process: Typical timeline is approximately 12 - 16 weeks
Structuring Sukuk Execution process: Typical timeline is approximately weeks Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 A Financial/Legal/ Technical Due Diligence Appointment of Parties Legal, financial & technical due diligence B Cashflow Preparation & Review Preparation & review of cashflow projections C Ratings Process Engaging with relevant rating agencies D Shariah approval on T&Cs Shariah approval on documentation Shariah Review & Approval E Regulatory Approval Submissions to regulatory authorities KEY WORKSTREAMS WEEK 1 WEEK 2 WEEK 3 WEEK 4 WEEK 5 WEEK 6 WEEK 7 WEEK 8 WEEK 9 WEEK 10 WEEK 11 WEEK 12 APPOINTMENT OF TRANSACTION PARTIES & SET UP Appointment of transaction parties STRUCTURE & TERMS Draft and finalise structure and term sheet LEGAL DUE DILIGENCE Due diligence kick-off meeting Due diligence process CREDIT RATING Credit rating process Indicative rating available Final rating available SHARIAH Shariah endorsement of Islamic structure Prelim Shariah pronouncement Final Shariah Approval - Transaction Documents REGULATORY APPROVALS FEDERAL GOVERNMENT Application for approval1 SECURITIES COMMISSION Preparation of SC subpack Verification of SC subpack Submission to SC ICM on the Islamic structure Clearance from SC ICM and SC approval (Deemed Approved) DOCUMENTATION Information Memorandum Preparation of IM Verification of IM Printing of IM Lodgement of IM Legal Documentation Preparation and finalisation of legal documents Execution of documents, programme ready for launch MARKETING Marketing and distribution LAUNCH Bookbuild, launch and price ISSUANCE PROCESS Legal Counsels deliver legal opinions Compliance of conditions precedent Issue Request BNM issuance procedure Issuance F Documentation Programme Agreement, Trust Deed & asset related documents G Marketing & Distribution Prepare marketing material Marketing of offering, including roadshow Launch H Issuance Final OC & Listing Compliance with CPs Settlement 16

Indicative Fees and Expenses for Reg S USD Sukuk Transactions
Structuring Sukuk Indicative Fees and Expenses for Reg S USD Sukuk Transactions Indicative Upfront Fees Indicative Amount (USD) Arranger/Manager/Bookrunners Fees Depending on credit of the issuer Legal Fees International Legal Counsel – Issuer 175,000 – 220,000 International Legal Counsel – Arranger 150,000 – 170,000 Domestic Legal Counsel – Issuer Depending on the jurisdictions Domestic Legal Counsel – Arranger Reporting Accountant Fee 150,000 – 200,000 Shariah Advisory Fee 25,000 Listing Agent Fee 10,000 Fiscal Agent Fee 30,000 SPV’s Establishment Expenses Miscellaneous (e.g. out-of-pocket expenses) TOTAL (USD) (excluding Arranger/Manager/Bookrunners Fees, Regulatory Fees* and Rating Fees**) 690,000 – 845,000 *if applicable **Corporate rating flat fee of USD 70,000 and issuance rating of 0.05% to 0.07% of issuance size or USD 50,000, whichever is higher. Indicative Annual Recurring Fees Rating Surveillance Fee 60,000 SPV Corporate Services Expenses 90,000 Fees for Arranger, Legal, Reporting Accountant, Shariah Advisory, Listing Agent. Fiscal Agent Indicative amount only, subject to scope of work and further discussion/negotiation with the relevant parties. In relation to arranger fees it shall be payable according to payment milestone to be agreed Principal Adviser Fee Upon discretion of the Issuer Regulatory Fee Application fee to Securities Commission Malaysia of MYR10,000 and lodgment of Offering Circular of MYR500 (Total RM10,500). Miscellaneous Fee The estimated out-of-pocket expenses may include Bank Negara Malaysia fee, travelling, printing, telephone charges etc Rating Fee & Rating Surveillance Fee Approximation based on international rating agency fee of corporate rating flat fee of USD70,000 and issuance rating of 0.05% on issuance size (assuming total issuance of USD1.0 billion) or USD50,000, whichever is higher and annual surveillance fee of USD60,000 Note: For programme size of up to USD1.0 billion in nominal value (or its equivalent in any other currencies) 17

Indicative Amount (MYR)
Structuring Sukuk Indicative Fees and Expenses for MYR Bonds and Sukuk Indicative Upfront Fees Conventional Bonds Sukuk Indicative Amount (MYR) Legal Counsel Fee (Arranger) 130,000 – 180,000 200,000 – 250,000 Reporting Accountant Fee (if applicable) 100,000 – 150,000 Securities Commission Fee 51,000 Rating Fee 600,000 Shariah Advisory Fee N/A 75,000 Trustee Fee 10,000 Agency Fee BNM Depository Fees 30,000 FAST Charges & RENTAS Annual Fees 1,400 Miscellaneous (e.g. out-of-pocket expenses) TOTAL (MYR) 1,027, ,127,400 1,172,400 – 1,272,400 (excluding Arranger/Manager/Bookbuilding Fees*) Indicative Annual Recurring Fees Agency Fees Rating Surveillance Fees 400,000 Trustee 50,000 RENTAS Annual Fees 4,000 529,000 Notes: Fees are indicative only and subject to negotiation with relevant parties. SC submission fee is RM50,000 for each of the Sukuk Programme and lodgment fee for Trust Deed and IM of RM500 each. The upfront and annual Trustee fees is quoted based on the standard market rates and subject to negotiation with the trustee. Indicative estimate based on issuance of RM500.0 million in 1 tranches, calculated based on BNM’s fee schedule (0.003% for the first RM500 million and thereafter at 0.001%). RENTAS annual membership fee is RM1,000 per stock and the charge for FAST is RM400 per stock. Subject to final issue size, tranches and stock codes to be created. Note: For Islamic MTN programme size of up to MYR1.0 billion in nominal value, 1st issue in 2tranches 18

Modes of Issuance Structuring Sukuk Modes of Issuance
The issuance of Sukuk is managed by the lead managers via the following modes: Modes of Issuance Bookbuilding Bought Deal Private Placement Bookbuilding Arranger source for quotes in terms of pricing and amount from selected potential investors Once obtained, arranger discusses with issuer on quotes to accept Quotes are accepted in ascending order up till issuer’s requirements are met Pricing determined by highest of accepted quotes and applied to entire issuance Private Placement Similar to bookbuilding process However, quotes are accepted differently whereby:- Issuer accepts most competitive quotes on pricing and Sukuk is issued to the places Bought Deal Issuer enters into agreement with certain party(ies) Arranger of transaction typically subscribes to the Sukuk at a price to be agreed upon (between issuer and arranger) Issuer is guaranteed of subscription of Sukuk Lead time to complete transaction is shorter than other modes of issuance 19

Structuring Sukuk Bookbuilding – Typical Global Roadshow Destinations for Reg S USD Sukuk transactions Marketing typically includes a “deal” roadshow to generate higher interest amongst investors The roadshow would usually cover key financial centres in Switzerland, Germany, South Korea, Hong Kong, Singapore, Kuala Lumpur, Abu Dhabi, Dubai, Riyadh, Bahrain and London, among others. It would enable issuers to engage potential key/anchor investors for the offering Proposed Roadshow Locations Roadshow Schedule Illustration Kuala Lumpur Singapore Hong Kong London Middle East Location Duration Format Kuala Lumpur 1 day 1-1 Meetings/Group Presentation Singapore Hong Kong/South Korea 2 days Middle East (Abu Dhabi / Dubai / Riyadh / Bahrain) 3 days Europe

(Cost Plus Mark up Sale)
Common Islamic Structures for Sukuk Issuances Proposed Islamic structures depend on the issuer’s nature of business and the availability of tangible assets, amongst other considerations Murabahah (Cost Plus Mark up Sale) Wakalah (Agency) Ijarah (Lease) Description Contract for a sale and purchase of asset(s) Cost and profit margins are made known upfront and agreed by parties involved Investment agency contract whereby a party authorises another party to act on behalf of the former based on the agreed terms and conditions Government of Malaysia issued the first sovereign USD Sukuk structured under the Shariah principle of Wakala in 2011 Lease-based contract whereby a lessor (asset owner) leases out an asset to a lessee at an agreed lease rental for a predetermined lease period. The ownership of the leased asset shall always remain with the lessor Most common and popular Islamic structure for issuers globally, either on sale-and-leaseback or head-lease and sub-lease basis Nature of Issuer’s Business Commonly adopted by companies which are asset light or restrictions on transfer of tangible assets Commonly adopted by companies which have sufficient fixed assets to allocate for the proposed issuance as the underlying assets will be locked up to maturity of the Sukuk Issuing Entity International Sukuk typically involves setting up of a special purpose vehicle as the issuing entity, whereas in Malaysia, the fundraising entity itself also assume the role of the issuer.

(Cost Plus Mark-up Sale) Dependence on Issuer’s Tangible Assets
Common Islamic Structures for Sukuk Issuances Proposed Islamic structures depend on the issuer’s nature of business and the availability of tangible assets, amongst other considerations Murabahah (Cost Plus Mark-up Sale) Wakalah (Agency) Ijarah (Lease) Underlying Assets Tangible asset is required, but not Issuer’s own assets Typically involves use of commodity(ies) purchased from, and sold to commodity brokers Required, subject to minimum of 51% of the value of the assets portfolio Leasable asset required to match 100% of the issuance size Legal title of asset typically remains with the original registered owner. Investors as beneficial owner of the assets Marketability Gaining prominence in the Malaysian sukuk market. Tradability restriction for certain investors as the Sukuk represent debt/receivables Acceptable to the majority of global Shariah scholars. Most common and popular Islamic structure for both issuers and investors globally including GCC (Gulf Cooperation Council) Notable Issuances Cagamas Berhad (2013)(RM) Golden Assets International Finance (2012)(RM) TH Plantations (2012)(RM) Qatar Islamic Bank (2013)(USD) Islamic Development Bank (2012, 2011)(USD) Government of Malaysia (2011)(USD) Kuveyt Turk (2014)(USD) Government of Turkey (2013, 2012)(USD) Government of Indonesia (2013, 2012)(USD) Government of Dubai (2013, 2012)(USD) Government of Qatar (2012)(USD) Low Dependence on Issuer’s Tangible Assets High

Sukuk PART IV : COMMON SUKUK STRUCTURES

(Lessee/ Obligor/ Servicing Agent)
Sukuk Ijarah (Lease) 2 Purchase Assets 2 Asset Purchase Price Declare Trust & Issue Sukuk Ijarah Sukukholders Company (Lessee/ Obligor/ Servicing Agent) SPV (Trustee) 3 Lease Assets 1 4 1 Purchase Undertaking Proceeds Rental 5 5 Servicing Agency Agreement 6 Sale Agreement 6 Exercise Price 24

Sukuk Ijarah (Lease) Case Study: Government of UK GBP200million Certificates This structure diagram was extracted from the prospectus dated 30 June 2014 25

Sukuk Wakalah (Agency)
Tangible > 51% Commodities < 49% Company (Wakeel/Original Owner/Lessee/ Obligor) Company (Purchaser) Bursa Suq Al-Sila’ Commodity Buyer 5(iv) Leases Assets 3 Sale of commodities on spot 8 1(a) 2 5(i) 5(iii) Exercise Price Purchase Order Appoint as Wakeel sale of commodities at Sale Price Assets Substitution Undertaking Issuer SPV (Trustee) Commodity Suppliers 4 Purchase of commodities on spot 5(ii) 6 Purchase Undertaking 8 1(b) 1(b) 7 Exercise Price Issue Sukuk Sukuk proceeds Periodic Distributions Sukukholders 26

Case Study: Government of Malaysia USD2,000million Certificates This structure diagram was extracted from the prospectus dated 28 June 2011.

Case Study: Exim Sukuk Malaysia Berhad’s USD1.0 billion Multi-Currency Sukuk Issuance Programme Islamic Structure Challenges and Highlights Structure and Diagram of Cashflows MEXIM’s Sukuk issuance was designed to raise Islamic funding to build MEXIM’s Islamic banking and finance business. MEXIM’s Sukuk were widely marketed to Middle Eastern based investors to promote and develop Malaysia’s global Sukuk market. Majority of Middle Eastern based investors only permit Sukuk with asset based Sukuk structures such as Ijarah, Musharakah, Mudarabah and Wakalah to be tradable. The following challenges were faced when structuring MEXIM’s Sukuk: Islamic investors tradability requirements, requiring asset based Sukuk (backed by tangible assets); and MEXIM’s lack of tangible assets to provide for its Sukuk given that it is a conventional bank. The Wakalah structure (as illustrated on the right) conceived for this exercise addressed the key issues faced by MEXIM with the following: MEXIM will only require to source/identify tangible assets of 34% of the Sukuk issuance proceeds; The tangible asset component can first be sourced externally and gradually substituted with MEXIM’s growing Islamic banking assets business through a substitution undertaking agreement; and The intangible asset component of the Wakalah portfolio (Commodity Murabahah) supports the remaining portion of Wakalah portfolio to reduce the required tangible assets. Sukukholders MEXIM (Wakeel) Cash Movements Non-Cash Movements Sukuk Issue Proceeds Periodic Distribution Amount and Distribution Amount Wakalah Agreement Incentive Fee EXIM Sukuk Malaysia Berhad (Issuer, Trustee and Purchaser and Seller of Tangible and Non-Tangible Assets) Tangible Asset (>34% outstanding Sukuk proceeds at all times) Intangible Asset (Commodity Murabahah) (<66% outstanding Sukuk proceeds at all times) Cost price of purchase of commodities Purchase of Commodities Sale of Commodities Deferred Sale Price Purchase of Tangible Assets and Non-Tangible Assets Purchase Price Exercise Price Sale of Tangible Assets and Non-Tangible Assets Bursa Malaysia Islamic Services Sdn Bhd MEXIM (Obligor) Substitution Undertaking Agreement MEXIM (Purchaser and Seller of Tangible Assets) Sale of Commodities Proceeds from Sale Price Bursa Suq Al-Sila’ This structure diagram was extracted from the prospectus dated 27 September 2013.

Sukuk Murabahah (Cost Plus Mark-up Sale)
Sukuk Proceeds Company (as Purchaser/ Issuer) 4 Sale of Commodities on spot 6 Issue Sukuk Bursa Suq Al-Sila’ 4 6 Commodity Trading Participant (CTP) Selling Price = Sukuk Proceeds Commodity Buyer Sukukholders represented by Trustee Sale of Commodities 2 5 Purchase Order with Undertaking to Purchase 7 Sale Price = Purchase Price + profit margin Commodity Suppliers Company as Purchase Agent on behalf of Sukukholders Purchase Price = Sukuk Proceeds 1 3 Agency Agreement 3 Purchase Commodities on spot 29

Sukuk PART V : GLOBAL MARKET TRENDS

Global Sukuk Market – Current State
International Bonds (Conventional & Sukuk) International Sukuk (including Ringgit Sukuk) USD 37 bln USD 3,082 bln The international Sukuk market is relatively small compared to the global debt market. However, the Sukuk market has experienced exponential growth as evidenced by an aggregate outstanding amount of USD257.6 billion1 as at 3Q 2014. Source: Bloomberg – International bonds market vs global Islamic bonds market (excluding securities with maturities equal to or less than 12 months) 1. Excluding government short term securities 31

Global Sukuk Market – Current State
Government and financial sectors dominated the primary global Sukuk market in 2014. Source: Bloomberg (based on total issuance amount of USD57.98billion)(as at 3Q 2014) 1. Excluding government short term securities

Trends in the Global Sukuk Market
The year 2014 has been a ground-breaking year in the Islamic capital markets as we witness non-Muslim majority global financial centres tap the global Sukuk market for their sovereign funding needs: July 2014: UK became the first country outside of the Muslim majority nations to issue Sukuk. The £200 million (USD343 million) issue with maturity of 5 years, priced at 2.036%, was 11.5 times oversubscribed attracting orders of more than £2 billion from global investors September 2014: The Hong Kong government's USD1 billion five-year Sukuk, priced at 2.005%, were oversubscribed 4.7 times with orders of US$4.7 billion September 2014: South Africa, the third non-Muslim majority country to issue sovereign Sukuk, issued USD500 million Sukuk which were more than four times oversubscribed, with an order book of $2.2 billion. The Sukuk, with maturity of 5 years and 9 months, were priced at 3.90% with a spread of 180 b.p. above the corresponding mid-swap benchmark rate October 2014: Luxembourg issued its debut €200 million (USD253 million) five-year Sukuk, with an order book that was more than two times oversubscribed. The AAA-rated sovereign Sukuk were priced at a profit rate of 0.436% Other non-Muslim majority countries including Australia and Thailand have also expressed interest to tap the global Sukuk Market.

Remaining Tenure (years)
Pricing Analysis – Government of UK The UK Sukuk’s yield move in tandem with the conventional UK Gilt The market data shows that there are more demand for the UK Sukuk in the secondary market compared to the conventional UK Gilt, given that the UK Sukuk is priced higher than the conventional UK Gilt Issuer Amount Outstanding (GBP mil) Coupon (%) Issue Date Maturity Date Remaining Tenure (years) Yield to Maturity (%) Price Islamic Structure United Kingdom Gilt (1¾% TREASURY GILT 2019 ) 30,212.43 1.75 22 Nov 2013 22 July 2019 4.62 1.345 101.81 N/A HM Treasury UK Sovereign Sukuk Plc 200.00 2.036 2 July 2014 1.304 103.27 Ijarah (Head Lease and Sub Lease) Sukuk in tandem with conventional bonds Yield is lower, Sukuk priced higher. Hence there are more demand for Sukuk in the secondary market. Source: Bloomberg – Historical Prices (as of 8 Dec)

Snapshot of the Global Sukuk Market
Malaysia continues to lead the world in sukuk, with over 63% market share in 2Q14 Global Sukuk Issuance Yearly Comparison Global Sukuk Issues 2Q14 vs. 2Q13 Global Sukuk Issues by Size & No of Deals Global Sukuk Trends by Quarter Global Sukuk Issues by Sector in 2Q14 Global Sukuk Issues by Issuer Type (in USD mil) MENA: Middle East and North Africa Global Sukuk Issues by Country in 2Q14 Global Sukuk Issues by Currency in 2Q14 Global Sukuk Issues by Structure in 2Q14 Source: Zawya 2Q14 Report

Sukuk PART VI : MALAYSIA AS CROSS BORDER SUKUK MARKETPLACE

Malaysia : Cross Border Sukuk Marketplace Malaysia has seen a number of cross-border MYR Sukuk transactions including issuers from neighbouring countries Last Issue Date Issuer Country Industry Amount Issued (MYR) Obligor Rating Maturity Coupon (%) 5/8/2014 Golden Assets International Finance Ltd Singapore Financials 375,000,000.00 Golden Assets International Finance AA2s 5Y 5.35 30/6/2014 TF Varlik Kiralama Anonim Sirketi Turkey 800,000,000.00 Turkiye Finans Katilim Bankasi AS AA3 6.00 18/3/2014 Bumitama Agri Ltd Indonesia Consumer Staples 500,000,000.00 5.25 8/11/2013 ABHC Sukuk Bhd Saudi Arabia Consumer Discretionary 120,000,000.00 Al Bayan Group Holding Company AA3s 1Y 4.2 31/7/2013 Tadamun Services Bhd Supranational 300,000,000.00 Islamic Development Bank AAA 3.6 6/6/2013 First Resources Ltd 600,000,000.00 AA2 7Y 4.35 30/4/2013 Bahrain Mumtalakat Holding Co BSC Bahrain 150,000,000.00 31/1/2013 Noble Group Ltd Hong Kong Energy 3Y 4.3 10/12/2012 National Bank of Abu Dhabi PJSC Arab Emirates 15Y 4.75 3/8/2012 Development Bank of Kazakhstan JSC Kazakhstan 240,000,000.00 5.5 18/6/2012 Gulf Investment Corp GSC Kuwait 325,000,000.00 10Y to 15Y 5.1 to 5.3 5/3/2012 Abu Dhabi National Energy Co Utilities 650,000,000.00 Abu Dhabi Water & Electricity Author AA1 10Y 4.65

Malaysia : Cross Border Sukuk Marketplace Malaysia has seen a number of cross-border MYR Sukuk transactions including issuers from neighbouring countries Note: Charts are based on issuances by 12 foreign issuers (MYR 12.72Billion; USD4.04 Billion Equivalent) Source: Bloomberg (as of 26th August 2014)

International Rating Agencies Malaysian Rating Agencies
Malaysia : Cross Border Sukuk Marketplace Malaysia has seen a number of cross-border MYR Sukuk transactions including issuers from neighbouring countries Indicative Rating Mapping Long Term Rating Scale International Rating Agencies Malaysian Rating Agencies S&P Moody’s Fitch RAM MARC Investment Grade AAA Aaa AA+ Aa1 AA Aa2 AA- Aa3 A+ A1 A A2 A- A3 BBB+ Baa1 AA1 BBB Baa2 AA2 BBB- Baa3 AA3 Speculative Grade BB+ Ba1 BB Ba2 BB- Ba3 BBB1 B1 B BBB2 B2 BBB3 B3 BB1 BB2 BB3 B+ B- C1 C C2 C3 D

Selected Sukuk Transaction Highlights

USD Sovereign Sukuk: Wakala Global Sukuk Berhad’s USD2
USD Sovereign Sukuk: Wakala Global Sukuk Berhad’s USD2.0 billion Islamic Trust Certificates First global sovereign USD Sukuk structured under the principle of Wakala Transaction Overview Transaction Details June 2011 USD2.0 billion Wakala Global Sukuk Berhad is a single purpose vehicle established by the Government of Malaysia, owned by the Minister of Finance (Incorporated) and the Federal Lands Commissioner, to undertake the proposed Sukuk issuance of up to USD2 billion in nominal value The Wakala Sukuk establishes a new benchmark in the Islamic capital markets. Wakala Global Sukuk offering was structured under the Shariah principle of Wakala Issuer Wakala Global Sukuk Berhad Facility Sukuk Size Series 1: USD1.2 billion Series 2: USD0.8 billion Tenure Series 1: 5 years Series 2: 10 years Coupon Series 1: 2.991% (UST bps) Series 2: 4.646% (UST bps) Maybank KE’s Role Joint Malaysian Adviser, Joint Bookrunner, Joint Lead Manager Issuance Date 28 June 2011 WAKALA GLOBAL SUKUK BERHAD Joint Malaysian Adviser Joint Bookrunner Joint Lead Manager Trust Certificates Transaction Highlights Distribution Analysis The establishment of a 10-year benchmark Sukuk reinforces Malaysia’s position as a leading international Islamic financial centre. The Sukuk assets under the Wakala principle comprise (i) a tangible asset component consisting of leasable assets and Shariah-compliant shares; and (ii) a Murabaha receivable component arising from a sale of Shariah-compliant commodities The Wakala Global Sukuk represents a number of “firsts”: First global sovereign USD Sukuk for 2011; First global sovereign USD Sukuk structured under the Shariah principle of Wakala; Largest dual-tranche global sovereign USD Sukuk at issue; and First 10-year global sovereign USD Sukuk and lowest absolute yields, achieved by an Asian sovereign for a new USD issuance The deal was significantly oversubscribed by 4.5 times, attracting interest in excess of USD9.0 billion and was fully distributed to over 320 global investors Allocation by geography (%) Demand breakdown (in USD billion)

PERUSAHAAN PENERBIT SBSN INDONESIA I Transaction Highlights
USD Sovereign Sukuk: Perusahaan Penerbit SBSN Indonesia I’s USD650.0 million Islamic Trust Certificates The Government of Indonesia’s first ever sovereign Sukuk issuance Overview on Issuer Transaction Details March 2009 USD650 million Perusahaan Penerbit SBSN Indonesia I was established in Indonesia on 21 October 2008 by the Republic of Indonesia, with its registered office at the Ministry of Finance of the Republic of Indonesia The issuer is a special purpose vehicle formed solely for the purpose of participating in the USD650 million Trust Certificates and is a wholly- owned subsidiary of the Republic of Indonesia Issuer Perusahaan Penerbit SBSN Indonesia I Facility Trust Certificates Size USD650 million Tenure 5 years Issue date 4 March 2009 Maturity 4 March 2014 Rating Moody’s: Ba3; S&P: BB-; Fitch: BB Issue Price 100 Regulatory Format Reg S / 144A Maybank KE’s Role International Co-Manager PERUSAHAAN PENERBIT SBSN INDONESIA I International Co-Manager Trust Certificates Transaction Highlights On 4 March 2009, the Government of Indonesia via a Perusahaan Penerbit SBSN Indonesia I, a special purpose vehicle, issued USD650.0 million in Trust Certificates, representing the Government of Indonesia’s first ever sovereign Sukuk issuance The Trust Certificates facility received a rating of Ba3 from Moody’s, BB- from S&P, and BB from Fitch The Trust Certificates were listed on SGX-ST in Singapore As International Co-Manager, Maybank KE assisted the Government of Indonesia to successfully place out the Trust Certificates to Investors

SIME DARBY GLOBAL BERHAD
USD Government-Linked Corporate Sukuk: Sime Darby’s Inaugural USD Sukuk Diversification of USD funding sources led to its foray in the Reg S Sukuk market Sime Darby’s Funding Requirements Programme and Issuance Salient Terms January 2013 USD800 million Inline with the Sime Darby Group’s global business, Sime Darby required access to foreign currency debt capital market funding. Sime Darby’s USD funding had traditionally been dominated by bank borrowings, and Sime Darby wanted to diversify its funding base into the USD debt capital markets. Issuer Sime Darby Global Berhad (wholly-owned subsidiary of Sime Darby) Facility Multi-Currency Sukuk Programme Programme Size USD1.5 billion in nominal value Format Reg S Structure Islamic (Ijarah) Issuance Size and Tenure 5 years:: USD400 million 10 years: USD400 million Programme and Issuance Ratings A/A/A3 by S&P, Fitch and Moody’s Maybank KE’s Role Joint Principal Adviser, Joint Lead Arranger, Joint Lead Manager, Dealer, Listing Agent (Bursa Malaysia) SIME DARBY GLOBAL BERHAD Joint Principal Adviser, Joint Lead Arranger, Joint Lead Manager, Dealer, Joint Shariah Adviser, Listing Agent Sukuk Our Funding Solution By establishing a multi-currency sukuk programme (the “Multi-Currency Sukuk Programme”), Sime Darby can issue sukuk in a host of international currencies including USD. Sime Darby, one of the largest listed government linked-companies in Malaysia would then be able to make its debut appearance in the international Reg S markets and tap new and large investor pools in the Middle East. Transaction Highlights Awards & Recognition Stronger Rating Than Malaysia’s Sovereign Rating: programme ratings of A, A and A3 from S&P, Fitch and Moody’s respectively and similar ratings for the first issuance – higher than the international sovereign rating of the Government of Malaysia. Successful International Reception: 9-day international roadshow spanning Asia, Europe and the Middle East saw the participation of over 180 institutional investors. Overwhelming Response: despite the heavy supply in the primary USD bond market, Sime Darby Global was able to attract a very strong order book of more than USD8.0 billion, or an over-subscription rate of over 10 times via 376 orders. Tight Yields Set New Pricing Benchmarks: (i) lowest ever coupon by any corporate globally in the USD sukuk market (ii) lowest ever USD coupon in a sukuk format by an Asian issuer (iii) lowest ever coupon by a Malaysian issuer in the USD market, in both the 5- and 10-year tenures. Best Deal of the Year (Malaysia) 2013 Best Islamic Finance Deal 2013 Best Foreign Currency Bond Deal 2013 Bank Negara Malaysia “Emas” Status Best Corporate Sukuk / New Sukuk 2014

USD Government-Linked Corporate Sukuk: Exim Sukuk Malaysia Berhad’s USD1.0 billion Multi-Currency Sukuk Issuance Programme The world’s first EXIM bank to issue USD sukuk Transaction Overview Transaction Details February 2014 USD300 million On 19 February 2014, Export-Import Bank of Malaysia Berhad (“MEXIM”) issued its USD300.0 million, 5-year Reg-S Sukuk (“Sukuk”) issuance via EXIM Sukuk Malaysia Berhad, pursuant to its USD1.0 billion Multicurrency Sukuk Issuance Programme (the “Programme”). The Sukuk is structured under the Shariah principle of Wakala comprising of a tangible asset component; and a Murabaha receivable component arising from a sale of Shariah-compliant commodities. The issue was accorded credit ratings of A- by Fitch Ratings and A3 by Moody's, which are on par with the Malaysian sovereign ratings. Issuer EXIM Sukuk Malaysia Berhad Facility Multicurrency Sukuk Issuance Programme Programme Size USD1.0 billion Programme Tenure Perpetual Issuance Size USD300 million Issuance Tenure 5 years Issuance Date 19 February 2014 Rating A- by Fitch Ratings and A3 by Moody's Mode of Issuance Bookbuilding Maybank KE’s Role Joint Principal Adviser, Joint Lead Arranger, Joint Lead Manager, Joint Bookrunner EXIM SUKUK MALAYSIA BERHAD Joint Principal Adviser, Joint Lead Arranger, Joint Lead Manager, Joint Bookrunner Sukuk Transaction Highlights Distribution Analysis The world’s first EXIM bank to issue USD sukuk. The inaugural Sukuk offering was priced at 140 basis points over US Treasuries (UST), which is equivalent to an all-in yield of 2.874% per annum, which was tightened from the initial price guidance of 165 basis points over UST. The Sukuk was executed intra-day following strong investor demand. The Sukuk was oversubscribed by approximately 10.6 times, attracting more than USD3.0 billion orders and was fully distributed to over 185 Islamic and conventional investors.

IDB TRUST SERVICES LIMITED
USD Sukuk: IDB Trust Services Limited’s USD1.5 billion Islamic Trust Certificate Issuance Strong demand from investors worldwide and aggressive pricing Transaction Overview Salient Terms September 2014 USD1.5 billion IDB TRUST SERVICES LIMITED Joint Lead Manager, Joint Bookrunner Islamic Trust Certificates The Islamic Development Bank (“IsDB”) is a supranational developmental bank, established in Owned by 56 member countries of the Organization of Islamic Cooperation (“OIC”), the IsDB’s primary objective is to foster the economic development and social progress of member countries and Muslim communities in non-member countries. Issued by IDB Trust Services Limited pursuant to its USD10.0 billion Trust Certificates Programme, the USD1.5 billion, 5-year issuance is guaranteed by the IsDB and rated the highest possible ratings by S&P, Fitch and Moody’s. The net proceeds will be used for IsDB’s general corporate purposes. Issuer IDB Trust Services Limited Guarantor The Islamic Development Bank Facility Trust Certificate Issuance Programme Programme Size USD10.0 billion Issue Size USD1.5 billion in nominal value Profit Rate 2.11% Issue Date 25 September 2014 Tenure 5 years Programme and Issue Ratings AAA, AAA, Aaa by S&P, Fitch and Moody’s, respectively Format Reg S Listing London Stock Exchange, Bursa Malaysia (under the Exempt Regime) and NASDAQ Dubai Maybank KE’s Role Joint Lead Manager and Joint Bookrunner Clearing Systems Euroclear Bank S.A./N.V. and Clearstream Banking, societé anonyme Transaction Highlights Worldwide investor demand: There was strong demand for this Sukuk from investors globally; with final allocation of 59% to investors from Middle East and North Africa (“MENA”), 27% to investors from Asia and 14% to investors from Europe. Aggressive-pricing and oversubscription: The transaction collated a strong order book which closed at approximately USD2.0 billion, 2.0 times the initial target issue size of USD1.0 billion. Upsizing and low all-in profit rate: Due to overwhelming demand, the transaction was upsized to USD1.5 billion at the lowest end of the spread, with final price at 10bps above the Mid-Swap (“MS”) against the initial price guidance of 10-15bps above MS. At MS + 10bps, the all-in profit rate is 2.11% for the 5year Sukuk. Distribution Analysis Investor Type Geographical Breakdown

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