Malaysia: PLUS Berhad in record RM23.4 billion (US$7.3 billion) sukuk (Islamic bond) sale

PLUS Berhad’s record RM23.4 billion (US$7.3 billion) Islamic bond sale is attracting life insurers with higher-than-average yields and maturities of as much as 25 years.

The Malaysian company is taking over the nation’s biggest toll-road operator PLUS Expressways Bhd in the first leveraged buyout using syariah-compliant bonds. PLUS offered RM11.3 billion of sukuk at a maximum yield of 5.07 per cent for a bond due in as long as 19 years, compared with average yields on global Islamic notes of 4.1 per cent. A portion of the total issue will be privately placed, at tenors of 20 to 25 years, according to the underwriters.

Companies in Malaysia have issued RM44.2 billion of sukuk this year, with almost 80 per cent due in less than 10 years, according to data compiled by Bloomberg. Sales of longer- dated debt may help set a benchmark for companies seeking funding for road and rail projects as part of the government’s US$444 billion development plan for the next decade.

“It’s rare to see an AAA-rated company issuing Islamic bonds with such long maturities,” Michael Chang, who oversees US$1 billion as head of fixed income at MCIS Zurich Insurance Bhd in Kuala Lumpur, the local unit of Zurich Financial Services AG, Switzerland’s largest insurer, said in an interview yesterday. 

“PLUS sukuk will be in demand among insurers, both Islamic and non-Islamic. It will also help deepen the Islamic bond market.”

PLUS was set up by Malaysia’s biggest pension fund, the Employee Provident Fund, and government-owned UEM Group Bhd. to take over the highway assets of PLUS Expressways following their RM23 billion acquisition of the company. In a leveraged buyout, the buyer borrows money to purchase a controlling interest in a company and usually uses the acquired assets as security for the loans or bonds.

Izzaddin Idris, chief executive officer of UEM, couldn’t be reached for comment yesterday when phoned by Bloomberg. The head of corporate communications at the company didn’t reply to an e- mail with questions.

PLUS is offering RM11.3 billion of sukuk maturing in five to 19 years. Orders close tomorrow and the bonds are expected to be issued on Jan 13, according to a sales advisory sent to investors on Dec 14. Malaysia’s CIMB Group Holdings Bhd, AMMB Holdings Bhd, Malayan Banking Bhd and RHB Capital Bhd are lead-managing the sale.

Malaysia’s five-year ringgit-denominated Islamic bonds yielded 3.37 per cent yesterday, the lowest level since Oct 18, 2010, according to data compiled by Bank Negara Malaysia. Ten- year notes yield 3.81 per cent. The Bloomberg-AIBIM-Bursa Malaysia Sovereign syariah Index, which tracks the most-traded local-currency debt, was little changed at 105.4510 yesterday. The gauge has climbed 4.3 per cent this year.

State-controlled power producer Tenaga Nasional Bhd sold RM4.85 billion of 20-year Islamic bonds at a yield of 4.9 per cent in October and attracted bids for 4.7 times the amount on offer. The PLUS sukuk surpasses the previous Malaysian record of RM12 billion sold by telecommunications company Binariang GSM Sdn in 2007.

There are still funds in the market looking to invest in sukuk even after new issues rose to an all-time high this year, according to Mohd Noor Hj A Rahman, chief executive officer at OSK-UOB Islamic Fund Management Bhd in Kuala Lumpur.

Sales of local-currency Islamic bonds in the Southeast Asian nation, the world’s biggest market for the debt, climbed 81 per cent in 2011, from RM24.4 billion in the same period of 2010, according to data compiled by Bloomberg. Global offerings of sukuk, which pay returns on assets to comply with Islam’s ban on interest, jumped 68 percent to US$26.3 billion, compared with US$15.7 billion in the year-earlier period.

“Demand for PLUS will be strong as there’s still plenty of liquidity in the market,” Mohd Noor said in an interview yesterday. “We’d be interested as there aren’t enough sukuk.”

Investors in Asia and the Middle East will be attracted to the PLUS sukuk because of its top credit rating and the potential for currency appreciation next year, according to Malek Khodr Temsah at Albaraka Banking Group BSC in Bahrain. PLUS Expressways is rated AAA by RAM Ratings Services Bhd, their highest investment grade, while Malaysian Rating Corp has assigned a preliminary AAA rating to PLUS Bhd.

“It makes for quite a compelling investment opportunity,” Temsah, assistant vice president of treasury and investment at the Manama-based bank, said by e-mail yesterday. “The hunt for yield will continue to be one of the dominant themes of global capital flows in 2012, despite the heightened risk aversion and this will bode well for state-backed corporate issuers out of Asia.”

Albaraka’s Temsah said his bank is only allowed to invest in dollar-denominated Islamic bonds given the risk-averse mandate of the company. The lender will be looking to adjust these “parameters” in 2012, he said.

Syariah-compliant bonds gained 6.6 per cent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets rose 6.8 per cent, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

“The yield for the PLUS sukuk is quite attractive compared with Islamic government bonds,” Calbert Loh, head of treasury at Kuala Lumpur-based Bangkok Bank Bhd, who helps manage RM2 billion, said in an interview yesterday. “Insurance companies would love to buy the longer-dated paper for returns on their life insurance policies.” -- (Bloomberg/15-Dec-2011)

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Malaysia, Emirates plan sukuk to fund aircraft

Malaysian Airline System Bhd (MAS) and AirAsia X Sdn are joining Emirates in planning sales of Islamic bonds as banks curb lending on Europe’s debt crisis.

MAS, voted Asia’s leading air carrier by World Travel Awards this year, may sell sukuk to partly fund an order for RM12 billion (US$3.8 billion) of aircraft due to be delivered by the end of 2014, chief executive officer Ahmad Jauhari Yayha told reporters in Kuala Lumpur on Dec. 7. AirAsia X, the region’s first long-haul budget service, may issue syariah-compliant debt to expand its fleet, CEO Azran Osman Rani said in an interview in the capital on Dec. 13.

The airlines are turning to Islamic markets on prospects European lenders will reduce credit next year due to the region’s financial crisis, according to Standard & Poor’s. Syndicated loans in Europe, the Middle East and Africa fell 31 per cent to US$184.4 billion this quarter from the previous three months, while global sales of sukuk rose 38 per cent to US$7.2 billion, according to data compiled by Bloomberg.

“Banks in Europe are less willing to provide financing for large asset purchases because of the region’s debt crisis and the need to preserve capital,” Hang Tuah Amin Tajudin, vice president of Kuala Lumpur-based OCBC Al-Amin Bank Bhd, the Islamic unit of Singapore’s Oversea-Chinese Banking Corp, said in a Dec 19 interview. “Sukuk is a good option as there’s still pent-up demand.”

Average yields on sukuk have dropped eight basis points, or 0.08 percentage point, to 4.09 per cent since reaching a seven- month high of 4.17 per cent on Dec 9, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Yields fell 65 basis points this year, following a 252 basis-point decline in 2010.

Yields on emerging-market bonds fell five basis points this month to 6.06 per cent and are down seven basis points since the end of last year, according to JPMorgan Chase & Co’s EMBI Global Sovereign Index.

“Sukuk may not necessarily be priced lower than conventional bonds but they offer the airlines a source of diversification,” Michael Oh-Lau, head of debt markets at Kuala Lumpur-based Maybank Investment Bank Bhd, said by e-mail on Dec 12. “The sukuk market opens doors to a wider group of investors.”

Islamic bonds are “naturally suited” to airlines given their structure and because aircraft can be used as the underlying asset to back the debt, said Badlisyah Abdul Ghani, chief executive officer of Kuala Lumpur-based CIMB Islamic Bank Bhd, a unit of CIMB Group Holdings Bhd.

Sukuk can be based on a sale and lease agreement such as Ijara, where the asset is rented out and final ownership is optional. Islamic bonds can also use Murabaha, a three-party transaction where a bank buys a product on behalf of the customer and sells it back at a mark up. There is also Istisna, a contract to make an item at an agreed price with the potential buyer making periodic payments.

“More airlines can be expected to look at the Islamic market for financing,” Badlisyah said in a Dec. 12 interview. “Ijara is a perfect Islamic structure for airlines.”

Selling syariah-compliant notes is an option for Emirates, the biggest international carrier, chairman Sheikh Ahmed bin Saeed al Maktoum said at the Dubai Airshow on Nov 15. Gary Chapman, president for group services, didn’t answer calls to his mobile phone this week seeking comment.

The company, based in the United Arab Emirates, sold US$550 million of floating rate dollar-denominated Islamic bonds in June 2005, the world’s first sale of sukuk by an airline. The price of the notes was 98.36 on Dec 20, compared with 94.12 at the end of last year, according to data compiled by Bloomberg.

Loans in Europe, the Middle East and Africa are poised for the worst quarter since the three months ended March 2010 and have climbed 8 per cent in 2011 to US$1 trillion from the year earlier period, data compiled by Bloomberg show. Global sales of Islamic bonds, which pay returns on assets to comply with Islam’s ban on interest, rose 68 per cent to US$26.4 billion, short of the 2007 record of US$31 billion.

The deteriorating outlook for the airline industry and the clampdown on lending may encourage companies to turn to the Islamic bond market, Shukor Yusof, a Singapore-based aviation analyst at S&P, said in an interview on Dec 20.

Profits may drop 57 per cent this year and 49 per cent in 2012 as Europe’s crisis hurts bookings, the International Air Transport Association said in a Dec 7 statement. Companies may be unprofitable next year should the contagion “spiral out of control,” according to the Montreal-based agency that represents 240 airlines worldwide. Jet fuel prices have increased 14 per cent this year to US$119.40 per barrel.

“Many airlines won’t be able to raise funds from their traditional sources,” said Shukor. “It’s natural for the Emirates and the Malaysian Airlines to look at sukuk as they are from Muslim jurisdictions.”

Syariah-compliant bonds returned 6.7 per cent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets rose 7.9 per cent, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

The difference between average yields and the London interbank offered rate, or Libor, was little changed this month at 286 and narrowed four basis points in 2011, according to the HSBC/NASDAQ index.

The yield on Dubai’s 6.396 per cent Islamic notes due in November 2014 fell two basis points to 5.89 per cent yesterday and has decreased from the year’s high of 6.64 per cent on Jan 31, according to data compiled by Bloomberg. The difference in yields between Malaysia’s sukuk and the Dubai Department of Finance’s debt narrowed three basis points yesterday to 316, data compiled by Bloomberg show.

The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign- currency Islamic debt sold by companies in Malaysia climbed to 104.2280 on Dec 20, the highest level since Nov 17. The gauge has gained 5.8 per cent this year.

AirAsia X, the long-haul affiliate of Asia’s biggest discount carrier AirAsia Bhd, is looking at Islamic bonds as it may add at least another 60 aircraft to an existing order of 30 Airbus SAS planes, CEO Azran said.

Emirates is building the world’s biggest fleet of wide-body jets and signed an order for US$18 billion of planes on Nov 13 with Boeing Co.

“In today’s environment, you need a variety of funding sources,” Azran said in telephone interview in Kuala Lumpur. “The situation in Europe plays a part.” -- (Bloomberg: 22-Dec-2011)

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Sukuk market is the fastest growing segment of international finance

"The sukuk market is the fastest growing part of Islamic finance. Indeed it is one of the fastest growing segments in the global financial market. Having attracted interest from the business community worldwide, it has helped place Islamic finance as a viable industry and as an asset class that is not confined to Muslim countries but as part and parcel of the international financial market," says Muhammad Al-Bashir Muhammad al-Amine, who is currently group head of Shariah compliance at Bank Al-Khair (formerly Unicorn Investment Bank) in Bahrain, in the introduction of his book titled “Global Sukuk and Islamic Securitisation Market - Financial Engineering and Product Innovation”.
The book is the latest analytical offering on the subject of sukuk and was published by Brill under its Arab and Islamic law series. The claims in the above paragraph are in contrast to the outrageous claim on the cover of the book that "The sukuk market is the fastest growing segment of international finance".
Much of the literature on the contemporary Islamic finance industry has had the unfortunate tendency of excessive eulogizing of the virtues and values of the Islamic system of financial and economic management based on descriptive rather than empirical and philosophical analysis. At the same time the style also bordered on exaggerated claims about the Islamic finance industry and its role and impact on the global financial system.
To be fair, some of the literature on Islamic finance and economy in the last decade or so has shown a remarkable improvement and in some cases have even threatened to offer a valuable alternative to the cornucopia of literature on the political economy, finance, development and the market - written largely from a neo-liberal or purely Keynesian or monetarist capitalist point of view.
While Al-Amine's “Global Sukuk and Islamic Securitization Market - Financial Engineering and Product Innovation” does not necessarily fall into any of the above categories, it is important to put some of his initial claims in perspective. The sukuk market may or may not be the fastest growing component in Islamic finance. There has been very little empirical research done on this and much of the statistics are extrapolations from aggregate figures issued by some individual securities regulators ort professional associations or by some information, data and news outlets.
The base figure at the same time for sukuk originations is very low - there are about $120 billion to $150 billion of sukuk outstanding in the world today of which over 60 percent are from Malaysian issuers. Compare this to the several trillion dollars each conventional bond market and the hedge fund market.
At the same time, the commodity Murabaha and Tawarruq market remain the single largest markets in the Islamic finance industry with an estimated $1.2 trillion of funds invested.
Similarly, the interest from the business community worldwide has been at best curiosity of a potentially interesting new fund-raising asset class, but in reality this interest has translated into a peripheral acceptability of and involvement in the sukuk market. How many Western or non-Muslim corporate/multilateral/quasi sovereign sukuk issuances, for instance, have come to the market? Hardly enough to count on both hands - Saxony Anhalt, East Cameron Partners, International Innovative Technologies (IIT), GE, Nomura, IFC, World Bank, Shell Malaysia and Tesco Malaysia. This is hardly the stuff of sukuk as a wild fire accelerant of global finance.
The point I am trying to make is that sukuk market dynamics is as complex as other asset classes whether in Muslim jurisdictions or non-Muslim ones. These relate to a cornucopia of issues - regulatory framework, enabling legislation, ratings, Shariah structures, purchase undertaking, guarantees, especially third party Sukuk guarantees, SPVs (special purpose vehicles), trust laws, court procedure (in case of defaults and recourse to law especially for different creditors), listings, secondary market, arbitration clauses and so on.
As such, any analysis will have to start from the basic proposition of the dynamics of the issuer jurisdiction, and these vary dramatically from country to country. Most Muslim jurisdictions for instance do not have Sukuk legislation in place, let alone tax neutrality or even the basic Islamic banking laws in place. Saudi Arabia, the world's largest Islamic finance market in terms of assets and liquidity, does not have a dedicated stand alone Islamic banking law in place, although its Sukuk law was designed in tandem with the debut sukuk offering of SABIC (Saudi Basic Industries Corp.), the world's largest exporter of petrochemicals, the SR3 billion SABIC I Sukuk issued in 2006. At the same time there are serious barriers to entry for investors in Saudi public Sukuk offerings because these are by law restricted to Saudi nationals and in the odd exception extended to GCC citizens.
These should not detract from Dr al-Amine's prodigious effort contained in 10 hefty chapters. These cover the growth of Islamic finance; concept and development of the sukuk market; Shariah basis for sukuk structures; sukuk structures; Global PLS sukuk structures; Securitization and sukuk; governing law in sukuk structures; Shariah convergence; risk factors in Sukuk Structures; and rating sukuk. These chapters contain valuable information and analysis, although the author could have been more forthcoming and thorough in the frankness of his conclusions and projections.
Even with this effort, there are a number of gaps - nothing on regulatory and legal frameworks (or the lack of them) which is an essential prerequisite to the development of an onshore sukuk or Islamic capital market. There is very little discussion of credit enhancement in sukuk structures through third party guarantees such as the initiative being contemplated by ICIEC and by Danajamin, the Bong and Sukuk Guarantee Agency in Malaysia.
Even in the governing law in sukuk structures, the examples used are curious - the Shamil/Beximco and TID/Blom Bank cases - these involved Murabaha and Wakala arrangements and not sukuk. Instead the legal issues raised by the default of the East Cameron, TID, IIG and the SAAD/AlGosaibi Sukuk issuances should have been covered in this chapter.
The East Cameron does get a cursory treatment in the Chapter on Securitization and Sukuk although the underlying issues are not discussed adequately especially the structure, the legal and the Shariah aspects. For instance, how come the lawyers for East Cameron Partners in the Chapter 11 Bankruptcy proceedings requested a ruling "that the sale of the ORRI (overriding royalty interest) was in essence a secured loan and not a 'true sale'". Surely this raises questions or at least an analysis of the Shariah basis of the structure and whether indeed the scholars were provided the relevant and complete information prior to them approving the Shariah basis of the structure. If not, investors and creditors may have been liable to claim compensation on the basis that the transaction was fraught with Gharar in that there may have been improper disclosure relating to the transaction.
The author rightly concludes that the growth of Islamic finance had outpaced that of the conventional industry in several countries and regions (the Middle East and Southeast Asia) in recent decades. This growth, he says, is likely to continue "at a furious pace in the coming years as the present size of the industry represents only a very small percentage of the overall global financial market place." His optimism is underpinned by his prediction that "this change will perhaps take place rather more quickly than many may expect," although he does not offer the reasons for this optimism, especially at a time when many Muslim countries are faced with volatility partly precipitated by the so-called Arab Spring events.
To the author, the holy grail of the future development of Islamic finance is the sukuk market, although the underlying assumptions on market growth and the involvement of the West are over-optimistic and empirically unproven and at best ambiguous. In his mitigation, Al-Amine rightly warns that "for the sukuk market to develop we need a robust market infrastructure in the region ns where Islamic finance is witnessing its rapid growth." At the same time this will also depend on developing a strong bond market in these regions; the Shariah legitimacy and authenticity of sukuk structures; a better engagement and discourse on sukuk structures by AAOIFI and the OIC Fiqh Academy, perhaps moving towards a more scientific way of issuing and developing fatwas in Islamic finance complete with market consultation and method of articulating these opinions and therefore paving the way to new ideas; the development of legal frameworks which are sustainable and based on internationally recognized standards and practices; and the potential role of sukuk in facilitating liquidity management, the strategy, for instance, on which the International Islamic Liquidity Management Corporation (IILM) has embarked upon.
Securitization, says Al-Amine, is expected to play a positive role in the future development of the sukuk market and seems to be the best way for the future of sukuk structuring because of the securitization condition of 'true sale' and legal transfer of ownership rather than just beneficial ownership. "These conditions shifts the risk of sukuk from the originator of the sukuk to the underlying asset. These principles ware more in line with Shariah principles than those followed so far in unsecured sukuk where the risk of the sukuk is fundamentally based on the creditworthiness of the originator," he maintains.
The author could have been more critical of the approach of the international rating agencies in rating not only sukuk but also Islamic finance products and institutions per se. They have stubbornly refused to design separate rating criteria to accommodate the specificities of Islamic finance in contrast to the Malaysian rating agencies RAM Rating Services and Malaysia Rating Corporation (MARC), which between them rate the largest number of sukuk issuance sin the world.
This book I believe is a valuable contribution to the literature on sukuk and Islamic finance, especially for regulators, market players, advisories, researchers, academics and students alike, although the author should be a little bit more discerning in some of his choices of references, especially media articles and reports by some institutions. (ArabNews/23-Dec-2011)

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