Presentation on theme: "Sukuk : A Viable Funding Option"— Presentation transcript:
1Sukuk : A Viable Funding Option HIGH-LEVEL WORKSHOP ON SUKUK Moscow, Russia15-17 December 2014Presented by:Arshad Ismail
2CONTENT SECTION INTRODUCTION TO ISLAMIC CAPITAL MARKETS SUKUK PART I : OVERVIEWPART II : DEVELOPING THE SUKUK MARKETPART III : STRUCTURING ANALYSISPART IV : COMMON SUKUK STRUCTURESPART V : GLOBAL MARKET TRENDSPART VI : MALAYSIA AS CROSS BORDER SUKUK MARKETPLACESELECTED SUKUK TRANSACTION HIGHLIGHTS2
4Financial services based on riba (interest) What are Islamic Capital Markets?Shariah essentially allows all economic activities unless clearly prohibitedIslamic 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 ShariahManufacture or sale of non-halal prohibited commoditiesConventional insuranceEntertainment activities which are not permitted by ShariahStock-broking or share trading in securities not approved by Shariah4
5PARTNERSHIP CONTRACTS SALE AND PURCHASE CONTRACTS What are Shariah Principles?Shariah principles form the basis of Shariah-compliant financial transactionsVarious 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 CONTRACTAGENCY CONTRACTIJARAH(Leasing)WAKALAH BILISTITHMAR(Investment Agency)PARTNERSHIP CONTRACTSSALE AND PURCHASE CONTRACTSIJARAH(Leasing)MURABAHAH(Cost Plus Sale)ISTISNA’(Purchase Order)WAKALAH BILISTITHMAR(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 pre- determined 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 ventureParties 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.
7What are Sukuk?Bonds are financial obligations arising from conventional borrowing and lending, whereas Sukuk represent ownership/interest in an assetSukuk 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:FeaturesSukukConventional BondsIssuerIssuer’s principal activities or the use of proceeds must not contradict ShariahNo restrictionApprovalsMust be approved by the relevant regulatory body and Shariah Adviser. In certain jurisdictions, together with the Shariah regulatory bodyMust be approved by the relevant regulatory bodyFormBased on trade transaction, represented by sale, lease, investment or joint venture contractsBased on model of borrowing/lending
8What are Sukuk? (Cont’d) FeaturesSukukConventional BondsUtilisation of ProceedsShould not contradict ShariahNo restrictionAsset requirementYesTypically no, except for Asset Backed Securities and secured transactionsSecurityCan be structured as clean or securedCredit Enhancement / Ring-fencingCan be included as features of both instrumentsUse of Special Purpose Vehicle (SPV) as issuing conduitRequired under selected structures to facilitate the underlying Shariah contracts and target investorsTypically not required except for Asset Backed Securities transactions when bankruptcy remoteness is requiredExposure to Bigger MarketSukuk enjoy a wider investor base from both sets of investors – Islamic & conventional, thereby maximizing demand for the securitiesSukuk may also lead to better profiling/exposure for issuers and enhance their credit profile in new marketsConventional bonds are not acceptable to Islamic investors. As such, limited exposure to conventional investors only
9What are Sukuk? (Cont’d) FeaturesSukukConventional BondsProgramme/ Issuance CostLead Manager/Lead Arranger fees are similar to conventional bonds transactionsDocumentation costs could be marginally higherShariah Advisory feeNo additional Shariah Advisory FeeDocumentationIn addition to the common issue documents, additional documents to evidence the Islamic transactionsCommon issue documents such as Programme Agreement/ Facility Agreement, Subscription Agreement, etcTax Incentives (in Malaysia)Tax deductibility on issuance expenses for selected structures: Ijarah and WakalahNo tax incentives on issuance expensesRiskBoth conventional bonds and Sukuk are exposed to credit risk and market risk
10Potential pricing competitiveness vis-a-vis conventional bonds Why Sukuk?Key Advantages of Issuing SukukTo tap into a new and wider investor base (Islamic and conventional funds)Potential pricing competitiveness vis-a-vis conventional bondsDiversification of investorsAlternative 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
12Creating a "level playing field" Regulation for Shariah Advisory Developing the Sukuk MarketMaking Islamic Capital Markets effective, efficient and conduciveDepending 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 PrinciplesWhat 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 jurisdictionRegulators 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 bondsDrawing 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 bondsAlso, profits/returns payable under Sukuk are treated similar to “interest” for tax purposes.Regulation for Shariah AdvisoryIn 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 productsAlternatively, 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
13Developing the Sukuk Market (Cont’d) Making Islamic Capital Markets effective, efficient and conducivePolicy PrinciplesWhat should be done?Evolving Regulatory LandscapeThe 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 regulationsBroadening the Investor BaseBroadening 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 corporateIncentives to Encourage Growth of the MarketIn 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
15Typical Terms and Conditions of a Reg S USD Sukuk Transaction Structuring SukukTypical Terms and Conditions of a Reg S USD Sukuk TransactionParametersExampleIssuerTypically, a special purpose vehicleFacilityTrust Certificates ProgrammeIslamic StructureIncluding Musharakah, Ijarah, Wakalah or such other structure as advised by the Shariah AdviserRatingRatings issued by international rating agencies namely, S&P’s, Moody’s and FitchUtilisation of ProceedsCapital expenditure, general corporate purposes and working capital, all for purposes which do not contradict ShariahMode of IssueBought deal/Private Placement/Bookbuilding. International Sukuk transactions (Reg S/Rule 144A) are typically issued via bookbuildingConditions PrecedentStandard bond documentation conditions precedent including execution of legal documentation, regulatory approvals, and statutory documentsRepresentations and WarrantiesStandard 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 DocumentsEvents of DefaultIncluding a default in payment obligations and a breach of any conditions of the Transaction DocumentsPositive CovenantsPerform certain obligations including complying with all terms and conditions under the Transaction Documents, and with all applicable laws and regulationsNegative CovenantsNot 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 issuedInformation CovenantsIncluding submission of audited accountsTransaction DocumentsIncluding but not limited to the Programme Agreement, Trust Deed and other asset related documentsGoverning LawEnglish Law. Asset related documents are typically governed by local law15
16Execution process: Typical timeline is approximately 12 - 16 weeks Structuring SukukExecution process: Typical timeline is approximately weeksWeeks12345678910111213141516AFinancial/Legal/ Technical Due DiligenceAppointment of PartiesLegal, financial & technical due diligenceBCashflow Preparation & ReviewPreparation & review of cashflow projectionsCRatings ProcessEngaging with relevant rating agenciesDShariah approval on T&CsShariah approval on documentationShariah Review & ApprovalERegulatory ApprovalSubmissions to regulatory authoritiesKEY WORKSTREAMSWEEK 1WEEK 2WEEK 3WEEK 4WEEK 5WEEK 6WEEK 7WEEK 8WEEK 9WEEK 10WEEK 11WEEK 12APPOINTMENT OF TRANSACTION PARTIES & SET UPAppointment of transaction partiesSTRUCTURE & TERMSDraft and finalise structure and term sheetLEGAL DUE DILIGENCEDue diligence kick-off meetingDue diligence processCREDIT RATINGCredit rating processIndicative rating availableFinal rating availableSHARIAHShariah endorsement of Islamic structurePrelim Shariah pronouncementFinal Shariah Approval - Transaction DocumentsREGULATORY APPROVALSFEDERAL GOVERNMENTApplication for approval1SECURITIES COMMISSIONPreparation of SC subpackVerification of SC subpackSubmission to SC ICM on the Islamic structureClearance from SC ICM and SC approval (Deemed Approved)DOCUMENTATIONInformation MemorandumPreparation of IMVerification of IMPrinting of IMLodgement of IMLegal DocumentationPreparation and finalisation of legal documentsExecution of documents, programme ready for launchMARKETINGMarketing and distributionLAUNCHBookbuild, launch and priceISSUANCE PROCESSLegal Counsels deliver legal opinionsCompliance of conditions precedentIssue RequestBNM issuance procedureIssuanceFDocumentationProgramme Agreement, Trust Deed & asset related documentsGMarketing & DistributionPrepare marketing materialMarketing of offering, including roadshowLaunchHIssuanceFinal OC & ListingCompliance with CPsSettlement16
17Indicative Fees and Expenses for Reg S USD Sukuk Transactions Structuring SukukIndicative Fees and Expenses for Reg S USD Sukuk TransactionsIndicative Upfront FeesIndicative Amount (USD)Arranger/Manager/Bookrunners FeesDepending on credit of the issuerLegal FeesInternational Legal Counsel – Issuer175,000 – 220,000International Legal Counsel – Arranger150,000 – 170,000Domestic Legal Counsel – IssuerDepending on the jurisdictionsDomestic Legal Counsel – ArrangerReporting Accountant Fee150,000 – 200,000Shariah Advisory Fee25,000Listing Agent Fee10,000Fiscal Agent Fee30,000SPV’s Establishment ExpensesMiscellaneous (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 FeesRating Surveillance Fee60,000SPV Corporate Services Expenses90,000Fees for Arranger, Legal, Reporting Accountant, Shariah Advisory, Listing Agent. Fiscal AgentIndicative 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 agreedPrincipal Adviser FeeUpon discretion of the IssuerRegulatory FeeApplication fee to Securities Commission Malaysia of MYR10,000 and lodgment of Offering Circular of MYR500 (Total RM10,500).Miscellaneous FeeThe estimated out-of-pocket expenses may include Bank Negara Malaysia fee, travelling, printing, telephone charges etcRating Fee & Rating Surveillance FeeApproximation 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 USD60,000Note: For programme size of up to USD1.0 billion in nominal value (or its equivalent in any other currencies)17
18Indicative Amount (MYR) Structuring SukukIndicative Fees and Expenses for MYR Bonds and SukukIndicative Upfront FeesConventional BondsSukukIndicative Amount (MYR)Legal Counsel Fee (Arranger)130,000 – 180,000200,000 – 250,000Reporting Accountant Fee (if applicable)100,000 – 150,000Securities Commission Fee51,000Rating Fee600,000Shariah Advisory FeeN/A75,000Trustee Fee10,000Agency FeeBNM Depository Fees30,000FAST Charges & RENTAS Annual Fees1,400Miscellaneous (e.g. out-of-pocket expenses)TOTAL (MYR)1,027, ,127,4001,172,400 – 1,272,400(excluding Arranger/Manager/Bookbuilding Fees*)Indicative Annual Recurring FeesAgency FeesRating Surveillance Fees400,000Trustee50,000RENTAS Annual Fees4,000529,000Notes: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 2tranches18
19Modes of Issuance Structuring Sukuk Modes of Issuance The issuance of Sukuk is managed by the lead managers via the following modes:Modes of IssuanceBookbuildingBought DealPrivate PlacementBookbuildingArranger source for quotes in terms of pricing and amount from selected potential investorsOnce obtained, arranger discusses with issuer on quotes to acceptQuotes are accepted in ascending order up till issuer’s requirements are metPricing determined by highest of accepted quotes and applied to entire issuancePrivate PlacementSimilar to bookbuilding processHowever, quotes are accepted differently whereby:-Issuer accepts most competitive quotes on pricing and Sukuk is issued to the placesBought DealIssuer 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 SukukLead time to complete transaction is shorter than other modes of issuance19
20Structuring SukukBookbuilding – Typical Global Roadshow Destinations for Reg S USD Sukuk transactionsMarketing typically includes a “deal” roadshow to generate higher interest amongst investorsThe 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 offeringProposed Roadshow LocationsRoadshow Schedule IllustrationKuala LumpurSingaporeHong KongLondonMiddle EastLocationDurationFormatKuala Lumpur1 day1-1 Meetings/Group PresentationSingaporeHong Kong/South Korea2 daysMiddle East (Abu Dhabi / Dubai / Riyadh / Bahrain)3 daysEurope
21(Cost Plus Mark up Sale) Common Islamic Structures for Sukuk IssuancesProposed Islamic structures depend on the issuer’s nature of business and the availability of tangible assets, amongst other considerationsMurabahah(Cost Plus Mark up Sale)Wakalah(Agency)Ijarah(Lease)DescriptionContract for a sale and purchase of asset(s)Cost and profit margins are made known upfront and agreed by parties involvedInvestment agency contract whereby a party authorises another party to act on behalf of the former based on the agreed terms and conditionsGovernment of Malaysia issued the first sovereign USD Sukuk structured under the Shariah principle of Wakala in 2011Lease-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 lessorMost common and popular Islamic structure for issuers globally, either on sale-and-leaseback or head-lease and sub-lease basisNature of Issuer’s BusinessCommonly adopted by companies which are asset light or restrictions on transfer of tangible assetsCommonly 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 SukukIssuing EntityInternational 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.
22(Cost Plus Mark-up Sale) Dependence on Issuer’s Tangible Assets Common Islamic Structures for Sukuk IssuancesProposed Islamic structures depend on the issuer’s nature of business and the availability of tangible assets, amongst other considerationsMurabahah(Cost Plus Mark-up Sale)Wakalah(Agency)Ijarah(Lease)Underlying AssetsTangible asset is required, but not Issuer’s own assetsTypically involves use of commodity(ies) purchased from, and sold to commodity brokersRequired, subject to minimum of 51% of the value of the assets portfolioLeasable asset required to match 100% of the issuance sizeLegal title of asset typically remains with the original registered owner. Investors as beneficial owner of the assetsMarketabilityGaining prominence in the Malaysian sukuk market.Tradability restriction for certain investors as the Sukuk represent debt/receivablesAcceptable 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 IssuancesCagamas 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)LowDependence on Issuer’s Tangible AssetsHigh
25Sukuk Ijarah (Lease)Case Study: Government of UK GBP200million CertificatesThis structure diagram was extracted from the prospectus dated 30 June 201425
26Sukuk Wakalah (Agency) Tangible > 51%Commodities < 49%Company (Wakeel/Original Owner/Lessee/ Obligor)Company (Purchaser)Bursa Suq Al-Sila’Commodity Buyer5(iv)Leases Assets3Sale of commodities on spot81(a)25(i)5(iii)Exercise PricePurchase OrderAppoint as Wakeelsale of commodities at Sale PriceAssetsSubstitution UndertakingIssuerSPV(Trustee)Commodity Suppliers4Purchase of commodities on spot5(ii)6Purchase Undertaking81(b)1(b)7Exercise PriceIssue SukukSukuk proceedsPeriodic DistributionsSukukholders26
27Sukuk Wakalah (Agency) Case Study: Government of Malaysia USD2,000million CertificatesThis structure diagram was extracted from the prospectus dated 28 June 2011.
28Sukuk Wakalah (Agency) Case Study: Exim Sukuk Malaysia Berhad’s USD1.0 billion Multi-Currency Sukuk Issuance ProgrammeIslamic Structure Challenges and HighlightsStructure and Diagram of CashflowsMEXIM’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); andMEXIM’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; andThe intangible asset component of the Wakalah portfolio (Commodity Murabahah) supports the remaining portion of Wakalah portfolio to reduce the required tangible assets.SukukholdersMEXIM (Wakeel)Cash MovementsNon-Cash MovementsSukuk Issue ProceedsPeriodic Distribution Amount and Distribution AmountWakalah AgreementIncentive FeeEXIM 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 commoditiesPurchase of CommoditiesSale of CommoditiesDeferred Sale PricePurchase of Tangible Assets and Non-Tangible AssetsPurchase PriceExercisePriceSale of Tangible Assets and Non-Tangible AssetsBursa Malaysia Islamic ServicesSdn BhdMEXIM(Obligor)Substitution Undertaking AgreementMEXIM(Purchaser and Seller of Tangible Assets)Sale of CommoditiesProceeds from Sale PriceBursa Suq Al-Sila’This structure diagram was extracted from the prospectus dated 27 September 2013.
29Sukuk Murabahah (Cost Plus Mark-up Sale) Sukuk ProceedsCompany(as Purchaser/ Issuer)4Sale of Commodities on spot6Issue SukukBursa Suq Al-Sila’46Commodity Trading Participant (CTP)Selling Price = Sukuk ProceedsCommodity BuyerSukukholdersrepresentedby TrusteeSale of Commodities25Purchase Order with Undertaking to Purchase7Sale Price = Purchase Price + profit marginCommodity SuppliersCompany as Purchase Agent on behalf of SukukholdersPurchase Price = Sukuk Proceeds13Agency Agreement3Purchase Commodities on spot29
31Global Sukuk Market – Current State International Bonds (Conventional & Sukuk)International Sukuk (including Ringgit Sukuk)USD 37 blnUSD 3,082 blnThe 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 securities31
32Global 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
33Trends 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 investorsSeptember 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 billionSeptember 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 rateOctober 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.
34Remaining Tenure (years) Pricing Analysis – Government of UKThe UK Sukuk’s yield move in tandem with the conventional UK GiltThe 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 GiltIssuerAmount Outstanding(GBP mil)Coupon (%)Issue DateMaturity DateRemaining Tenure (years)Yield to Maturity (%)PriceIslamic StructureUnited Kingdom Gilt(1¾% TREASURY GILT 2019 )30,212.431.7522 Nov 201322 July 20194.621.345101.81N/AHM Treasury UK Sovereign Sukuk Plc200.002.0362 July 20141.304103.27Ijarah (Head Lease and Sub Lease)Sukuk in tandem with conventional bondsYield is lower, Sukuk priced higher. Hence there are more demand for Sukuk in the secondary market.Source: Bloomberg – Historical Prices (as of 8 Dec)
35Snapshot of the Global Sukuk Market Malaysia continues to lead the world in sukuk, with over 63% market share in 2Q14Global Sukuk Issuance Yearly ComparisonGlobal Sukuk Issues 2Q14 vs. 2Q13Global Sukuk Issues by Size & No of DealsGlobal Sukuk Trends by QuarterGlobal Sukuk Issues by Sector in 2Q14Global Sukuk Issues by Issuer Type (in USD mil)MENA: Middle East and North AfricaGlobal Sukuk Issues by Country in 2Q14Global Sukuk Issues by Currency in 2Q14Global Sukuk Issues by Structure in 2Q14Source: Zawya 2Q14 Report
36SukukPART VI : MALAYSIA AS CROSS BORDER SUKUK MARKETPLACE
37Malaysia : Cross Border Sukuk Marketplace Malaysia has seen a number of cross-border MYR Sukuk transactions including issuers from neighbouring countriesLast Issue DateIssuerCountryIndustryAmount Issued (MYR)ObligorRatingMaturityCoupon (%)5/8/2014Golden Assets International Finance LtdSingaporeFinancials375,000,000.00Golden Assets International FinanceAA2s5Y5.3530/6/2014TF Varlik Kiralama Anonim SirketiTurkey800,000,000.00Turkiye Finans Katilim Bankasi ASAA36.0018/3/2014Bumitama Agri LtdIndonesiaConsumer Staples500,000,000.005.258/11/2013ABHC Sukuk BhdSaudi ArabiaConsumer Discretionary120,000,000.00Al Bayan Group Holding CompanyAA3s1Y4.231/7/2013Tadamun Services BhdSupranational300,000,000.00Islamic Development BankAAA3.66/6/2013First Resources Ltd600,000,000.00AA27Y4.3530/4/2013Bahrain Mumtalakat Holding Co BSCBahrain150,000,000.0031/1/2013Noble Group LtdHong KongEnergy3Y4.310/12/2012National Bank of Abu Dhabi PJSCArab Emirates15Y4.753/8/2012Development Bank of Kazakhstan JSCKazakhstan240,000,000.005.518/6/2012Gulf Investment Corp GSCKuwait325,000,000.0010Y to 15Y5.1 to 5.35/3/2012Abu Dhabi National Energy CoUtilities650,000,000.00Abu Dhabi Water & Electricity AuthorAA110Y4.65
38Malaysia : Cross Border Sukuk Marketplace Malaysia has seen a number of cross-border MYR Sukuk transactions including issuers from neighbouring countriesNote: Charts are based on issuances by 12 foreign issuers (MYR 12.72Billion; USD4.04 Billion Equivalent)Source: Bloomberg (as of 26th August 2014)
39International 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 countriesIndicative Rating MappingLong Term Rating ScaleInternational Rating AgenciesMalaysian Rating AgenciesS&PMoody’sFitchRAMMARCInvestment GradeAAAAaaAA+Aa1AAAa2AA-Aa3A+A1AA2A-A3BBB+Baa1AA1BBBBaa2AA2BBB-Baa3AA3Speculative GradeBB+Ba1BBBa2BB-Ba3BBB1B1BBBB2B2BBB3B3BB1BB2BB3B+B-C1CC2C3D
41USD Sovereign Sukuk: Wakala Global Sukuk Berhad’s USD2 USD Sovereign Sukuk: Wakala Global Sukuk Berhad’s USD2.0 billion Islamic Trust CertificatesFirst global sovereign USD Sukuk structured under the principle of WakalaTransaction OverviewTransaction DetailsJune 2011USD2.0 billionWakala 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 valueThe Wakala Sukuk establishes a new benchmark in the Islamic capital markets. Wakala Global Sukuk offering was structured under the Shariah principle of WakalaIssuerWakala Global Sukuk BerhadFacilitySukukSizeSeries 1: USD1.2 billionSeries 2: USD0.8 billionTenureSeries 1: 5 yearsSeries 2: 10 yearsCouponSeries 1: 2.991% (UST bps)Series 2: 4.646% (UST bps)Maybank KE’s RoleJoint Malaysian Adviser, Joint Bookrunner, Joint Lead ManagerIssuance Date28 June 2011WAKALA GLOBAL SUKUK BERHADJoint Malaysian AdviserJoint BookrunnerJoint Lead ManagerTrust CertificatesTransaction HighlightsDistribution AnalysisThe 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 commoditiesThe 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; andFirst 10-year global sovereign USD Sukuk and lowest absolute yields, achieved by an Asian sovereign for a new USD issuanceThe deal was significantly oversubscribed by 4.5 times, attracting interest in excess of USD9.0 billion and was fully distributed to over 320 global investorsAllocation by geography (%)Demand breakdown (in USD billion)
42PERUSAHAAN PENERBIT SBSN INDONESIA I Transaction Highlights USD Sovereign Sukuk: Perusahaan Penerbit SBSN Indonesia I’s USD650.0 million Islamic Trust CertificatesThe Government of Indonesia’s first ever sovereign Sukuk issuanceOverview on IssuerTransaction DetailsMarch 2009USD650 millionPerusahaan 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 IndonesiaThe 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 IndonesiaIssuerPerusahaan Penerbit SBSN Indonesia IFacilityTrust CertificatesSizeUSD650 millionTenure5 yearsIssue date4 March 2009Maturity4 March 2014RatingMoody’s: Ba3; S&P: BB-; Fitch: BBIssue Price100Regulatory FormatReg S / 144AMaybank KE’s RoleInternational Co-ManagerPERUSAHAAN PENERBIT SBSN INDONESIA IInternational Co-ManagerTrust CertificatesTransaction HighlightsOn 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 issuanceThe Trust Certificates facility received a rating of Ba3 from Moody’s, BB- from S&P, and BB from FitchThe Trust Certificates were listed on SGX-ST in SingaporeAs International Co-Manager, Maybank KE assisted the Government of Indonesia to successfully place out the Trust Certificates to Investors
43SIME DARBY GLOBAL BERHAD USD Government-Linked Corporate Sukuk: Sime Darby’s Inaugural USD SukukDiversification of USD funding sources led to its foray in the Reg S Sukuk marketSime Darby’s Funding RequirementsProgramme and Issuance Salient TermsJanuary 2013USD800 millionInline 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.IssuerSime Darby Global Berhad (wholly-owned subsidiary of Sime Darby)FacilityMulti-Currency Sukuk ProgrammeProgramme SizeUSD1.5 billion in nominal valueFormatReg SStructureIslamic (Ijarah)Issuance Size and Tenure5 years:: USD400 million10 years: USD400 millionProgramme and Issuance RatingsA/A/A3 by S&P, Fitch and Moody’sMaybank KE’s RoleJoint Principal Adviser, Joint Lead Arranger, Joint Lead Manager, Dealer, Listing Agent (Bursa Malaysia)SIME DARBY GLOBAL BERHADJoint Principal Adviser, Joint Lead Arranger, Joint Lead Manager, Dealer, Joint Shariah Adviser, Listing AgentSukukOur Funding SolutionBy 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 HighlightsAwards & RecognitionStronger 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) 2013Best Islamic Finance Deal 2013Best Foreign Currency Bond Deal 2013Bank Negara Malaysia “Emas” StatusBest Corporate Sukuk / New Sukuk 2014
44USD Government-Linked Corporate Sukuk: Exim Sukuk Malaysia Berhad’s USD1.0 billion Multi-Currency Sukuk Issuance ProgrammeThe world’s first EXIM bank to issue USD sukukTransaction OverviewTransaction DetailsFebruary 2014USD300 millionOn 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.IssuerEXIM Sukuk Malaysia BerhadFacilityMulticurrency Sukuk Issuance ProgrammeProgramme SizeUSD1.0 billionProgramme TenurePerpetualIssuance SizeUSD300 millionIssuance Tenure5 yearsIssuance Date19 February 2014RatingA- by Fitch Ratings and A3 by Moody'sMode of IssuanceBookbuildingMaybank KE’s RoleJoint Principal Adviser, Joint Lead Arranger, Joint Lead Manager, Joint BookrunnerEXIM SUKUK MALAYSIA BERHADJoint Principal Adviser, Joint Lead Arranger, Joint Lead Manager, Joint BookrunnerSukukTransaction HighlightsDistribution AnalysisThe 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.
45IDB TRUST SERVICES LIMITED USD Sukuk: IDB Trust Services Limited’s USD1.5 billion Islamic Trust Certificate IssuanceStrong demand from investors worldwide and aggressive pricingTransaction OverviewSalient TermsSeptember 2014USD1.5 billionIDB TRUST SERVICES LIMITEDJoint Lead Manager, Joint BookrunnerIslamic Trust CertificatesThe 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.IssuerIDB Trust Services LimitedGuarantorThe Islamic Development BankFacilityTrust Certificate Issuance ProgrammeProgramme SizeUSD10.0 billionIssue SizeUSD1.5 billion in nominal valueProfit Rate2.11%Issue Date25 September 2014Tenure5 yearsProgramme and Issue RatingsAAA, AAA, Aaa by S&P, Fitch and Moody’s, respectivelyFormatReg SListingLondon Stock Exchange, Bursa Malaysia (under the Exempt Regime) and NASDAQ DubaiMaybank KE’s RoleJoint Lead Manager and Joint BookrunnerClearing SystemsEuroclear Bank S.A./N.V. and Clearstream Banking, societé anonymeTransaction HighlightsWorldwide 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 AnalysisInvestor TypeGeographical Breakdown
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