Malaysia: MARC affirms rating on Kimanis Power RM1.16b Sukuk

KUALA LUMPUR: Malaysian Rating Corporation Bhd (MARC) has affirmed its AA-IS rating on Kimanis Power Sdn Bhd's (KPSB) RM1.16bil Sukuk programme with a stable outlook. 

 

It said on Wednesday the affirmed rating was backed by the favourable terms of KPSB’s 21-year power purchase agreement (PPA) with the offtaker, Sabah Electricity Sdn Bhd (SESB) under which demand risk is transferred to the offtaker. 

SESB is 83% owned by power giant Tenaga Nasional Bhd (TNB), which has a senior unsecured debt rating of AAA/Stable. 

“The affirmed rating incorporates Kimanis power plant’s commendable operating performance in meeting PPA requirements in relation to the heat rate and unscheduled outage limit. 

“The rating also considers Petronas Gas Bhd’s 60% ownership of and substantial involvement in KPSB, the use of standard and well-proven technology and the gas sale agreement (GSA) with Petronas Gas’ parent Petroliam Nasional Bhd (Petronas) until June 2029 which mitigates fuel supply risk. 

 

KPSB owns the 285-megawatt (MW) combined-cycle gas-fired power plant at Kimanis Bay, Sabah. 

Kimanis O&M Sdn Bhd handles the operations and maintenance of the Kimanis power plant. General Electric Company (GE) is responsible for maintaining the gas turbines under a long-term contractual service agreement.

MARC said the Kimanis power plant achieved a lower load factor than the initial projection of 90% since achieving its full commercial operations date (COD) in November 2014 due to the excess capacity on the west coast of Sabah. 

Hence, KPSB had revised its load factor assumptions to 60% for the period between 2015 and 2017 in the revised budget. 

In 2015, the plant’s average load factor was 64.7% (2014: 51.2%). Its energy payment (EP) receipts of RM125.9mil were 16.4% above the budgeted amount in 2015. 

KPSB’s actual capacity payment (CP) of RM201.6mil was in line with the budgeted amount following the resolution of gas supply issues in early 2015. 

The plant’s average availability stood at 95.4% during the period under review. MARC  noted the plant’s average actual heat rates were within the PPA heat rate requirement and KPSB has achieved full pass-through of fuel costs in its first full year of operations.

KPSB recorded higher electricity sales of 1,519.6 gigawatt hours (GWh) in 2015 (2014: 967.0 GWh), reflecting the full commercial operations of its three generating blocks since November 2014. 

Operating profit margin was 26.8% on the back of electricity sales of RM200.1mil and operation cost of RM166.8mil. Fuel cost per unit generated improved to 5.94 sen per kilowatt-hour (kWh) (2014: 9.82 sen/kWh) due to the lower usage of distillates. 

Net cash flow improved to RM40.2mil (2014: deficit of RM299mil) as the plant incurred lower capital expenditure of RM2mil (2014: RM318.7mil). 

Cash balance stood at RM214.3mil in 2015 while KPSB’s leverage ratio improved to 1.27 times following the repayment of its Series 2, Tranche 1 sukuk amounting to RM35mil in December 2015. 

“Going forward, MARC expects KPSB’s leverage ratio to decrease progressively with the accumulation of retained earnings and paring down of the outstanding rated sukuk.

“Under Kimanis’ updated financial projections, KPSB’s debt servicing capacity remains adequate with minimum and average finance service coverage ratios (FSCR) of 2.24 times and 3.35 times respectively during the Sukuk tenure. 

“The projections are premised on the plant load factor of 60% which will progressively step up to 90% beginning in 2020,” it said.

MARC’s sensitivity results show that KPSB’s cash flows are sensitive to reductions in CP and higher-than-projected O&M costs. 

KPSB can withstand an increase in O&M costs by 73% before breaching its FSCR covenant in 2026. 

“MARC wishes to highlight that the cash balance brought forward from 2015 amounting to RM214.3mil is sufficient to meet the financial obligations in 2016 totalling RM154.0mil.

“The stable rating outlook on the sukuk programme reflects MARC’s expectations that the power plant’s cash flow generation will be in line with projections. 

“Conversely, the rating would come under pressure if the plant’s operations underperform significantly, leading to a weakening of KPSB’s liquidity position, and/or if the offtaker’s credit profile deteriorates,” said MARC.

(The Star Online / 10 August 2016)

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Islamic finance ideal for agricultural, micro and rural financing

LAHORE, Aug. 10 (MNA) – Islamic Finance provides an ideal mechanism to facilitate agricultural, irrigation, livestock, micro and rural financing products to boost the green economy.

Muhammad Zubair Mughal, the Chief Executive Officer, Al-Huda Center of Islamic Banking and Economics (CIBE) addressed the international conference Best Practices in Rural and Agricultural Finance jointly organized by African Rural and Agricultural Credit Association (AFRACA) in partnership with the Rwanda Development Bank (BRD), the Ministry of Agriculture, and IFAD in Kigali, the capital of Rwanda last week and was attended more than 300 delegates of 40 countries: “It not only provides a sustainable solution but creates the positive economic impact in lives of the farmers and rural communities,” said Mr. Mughal.

Mughal stated that the impact of Islamic financial products was much higher than any other financial products due to its uniqueness of asset-based financing and other features, features which is averse to diversion of cash fund for other purposes; “Islamic financial  products can be utilized in many fields for the development of agricultural, rural and micro financing in buying of seed, fertilizer, harvesting and planting equipment, agricultural  inputs, tractor, pesticides, farming goods, solar tube-wells, etc., while Salam is ideal product for agricultural financing, through which a farmer can fulfill all the financial needs for whole crop circle, e.g. liquidity, seed, pesticide, fertilizer, harvesting, irrigation, and market linkages,” said he.

“Istisna can be used for small manufacturing business, dairy or agricultural production, construction of warehouses and cold storages, rural entrepreneur development, while Ijara is good for leasing of tractors, agricultural equipment, threshers, tube wells, small production unit lease, sugarcane planter, rice planter, harvesting vehicles, etc. Meanwhile, farmer can utilize musharaka, mudarabaand diminishing musharaka for rural housing, forest development, agricultural inputs, farming, sprinkler/drip/solar pumps, tube wells, microenterprise and SME setup, Agricultural Joint venture projects, Dairy and livestock development, etc.,” he detailed.

“The Islamic finance has specialized financial solutions for each segment of rural poverty, e.g. for extreme poor; zakat, sadqa, and fitr are available as grant-based financial product, for poor or upper lower class.  

“Irrigation financing is a big challenge for the development of agriculture, and we can observe that only few banks and financial institutions have specialized products to cater the financial needs for  irrigation financing;  but we can understand that Islamic finance again as a step forward to address this issue,” he told the conference.

he concluded that Islamic Financial products were ideal for financial inclusion for those segments of society who are averse to interest-based financial products due to religious reasons; “we have to promote Islamic financial products as system, which can be benefited by Muslim and non-Muslim equally but for Muslim,  there is an extra benefit that it is according to their religious believes but for Non-Muslims, it is an ideal solution of Banking, Finance and Business for prosperity and development,” he added.

Al-Huda Center of Islamic Banking and Islamic Economics (CIBE) is a well-recognized name in Islamic banking and finance industry for research, advisory and capacity building over 11 years. The prime goal has always been to adhere to the commitments and provide state-of-the-art advisory consultancy and educational services through various well-recognized modes vis-à-vis Islamic financial product development, sharia advisory, trainings workshops, and Islamic microfinance and takaful consultancies, etc.

(Mehr News Agency / 10 August 2016)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Ivory Coast returns to sovereign sukuk market, after Togo debut

Ivory Coast plans to complete a sale of 150 billion CFA francs ($263 million) worth of Islamic bonds later this month, the transaction's lead arranger said on Tuesday, following Togo's debut sale of sovereign sukuk launched last month.

The two West African nations join Senegal in tapping the market for sukuk, helping expand the use of Islamic financing options outside of the industry's core centres in the Middle East and Southeast Asia. 

The Ivory Coast will sell the 7-year sukuk using a lease-based contract known as ijara, with the subscription period closing on Aug. 31, according to the Saudi-based Islamic Corporation for the Development of the Private Sector (ICD). 

This would represent the second phase of a 300 billion CFA franc sukuk programme set up last year by the world's top cocoa producer and French-speaking West Africa's economic powerhouse. Togo plans to complete the sale of its sukuk later this week, aiming to raise 150 billion CFA franc with a 10-year maturity and a 6.5 percent yield. 

The ICD is the lead arranger for both the Togo and Ivory Coast sukuk. These back-to-back deals could boost the ICD's efforts to expand its activities across Africa, where the development of Islamic finance has lagged despite being home to a quarter of the world's Muslims. Nigeria and Kenya are also planning to issue sovereign sukuk of their own, in part to help fund large infrastructure needs, although the timing for such deals has yet to be determined.

(Standard Digital / 09 August 2016)

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GCC bonds & Sukuk market gets a new life in Q2

The GCC bond and Sukuk market demonstrated improved activity in Q2 2016 especially on the sovereign front as the market witnessed prominent issuances from regional governments demonstrating appetite for debt in the region still exists. However, the lower oil prices, which has contributed to increased budget deficits and slower growth, has led to same credit deterioration such as the recent downgrade by rating agencies of Saudi Arabia, Oman and Bahrain.

Bond Issuances

Q2 2016 marked one of the largest bond issuances in the region by the Government of Qatar amounting to US$9 billion, followed by the Government of Abu Dhabi amounting to US$5 billion, its first in 7 years. The Government of Qatar’s US$9 billion bond was a US$3.5 billion issuance with an issue price of 98.924% of the principal amount, a US$3.5 billion issuance with an issue price of 98.963% of the amount, and US$2 billion issuance with an issue price of 97.606% of the principal amount. The Government of Abu Dhabi issued US$5 billion of bonds with a US$2.5 billion issuance with an issue price of 99.753% of the aggregate nominal amount and a US$2.5 billion with an issue price of 99.562% of the aggregate nominal amount.

In corporate bonds issuances, Gulf International Bank BSC-Riyadh issued its US$533 million 5 year bond with a coupon rate of 3.4%, while Abu Dhabi National Energy Co PJSC (TAQA) issued a US$1 billion bond, spread into two senior notes tranches of US$500 million each, due in 5 and 10 years respectively.

Sukuk Issuances

Bank Al-Jazirasuccessfully issued a US$533 million 10 year Sukuk, with an option for the lender to redeem the Sukuk after five years.

On the sovereign front, the Central Bank of Bahrain was an active contributor in the region issuing three Sukuk Al Salam each worth US$114 million (BD 43 million) and three short term leasing type Sukuk each worth US$69 million (BD 26 million).

Steven Drake, Head of PwC’s Capital Markets and Accounting Advisory Services team in the Middle East region said: “Bond and Sukuk activity improved compared to the previous quarter of this year, with notable issuances from regional governments such as of Qatar and Abu Dhabi and this is expected to pick up further in the next quarter as the Kingdom prepares its first ever proposed USD 10 billion bond issuance. However, challenging market conditions and uncertainty amongst investors and issuers may impact activity for the remainder of 2016 and a surge in borrowing cost could weigh on market appetite.

(Wealth Monitor / 03 August 2016)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Mismanagement, lack of security unfold in Zakat distribution

Distribution of clothes for Zakat ahead of Eid-ul-Fitr is going on in the country amid mismanagement and lack of security.

Some 15 to 20 poor women and men wearing shabby clothes were seen trying to enter into a shop through its half-opened door at East Tejturi Bazar in Dhaka’s Farmgate area to collect Zakat clothes.

The distributors did not probably bother to maintain any system to ensure security of these poor people, including also some old people, who were trying to get their much expected Zakat by pushing one another.

Men were not giving any space to the women first fearing to be deprived of the ‘gift’ distributed by a private company probably.  

On being asked about the security of these people, an employee of the company told The Daily Star that they didn’t have any other option except keeping the door half-opened.Some people have been seen very pleased after getting the ‘gift’ of Zakat clothes while others were seen fighting to get theirs.

However, he failed to reply what would happen if any life is lost in any untoward incident.

It is definitely a good gesture that any individual or private institution wants to help the poor. But none can ignore the security concern for these underprivileged people.

(The Star Online Report / 04 July 2016)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia: Sukuk issuance to remain muted 6 to 18 months, says S&P

KUALA LUMPUR:  S&P Global Ratings expects Sukuk issuance will remain muted over the next six to 18 months, with total issuance of US$50bil to US$55bil in 2016.

It said on Monday that Sukuk issuance in the second half of 2016 will continue to depend on monetary policy developments and volatility in developed markets and also policy actions of sovereigns in core markets – namely Gulf Cooperation Council countries and Malaysia – in response to lower oil prices.

The ratings agency said explained that plummeting oil prices have not boosted sukuk issuance despite some commentators' expectations low oil prices would spur governments in oil-exporting countries to tap the Sukuk market for funding, and maintain current and capital spending.

Instead, total issuance actually dropped in 2015 compared with the previous year, it explained in its report entitled, “Why low oil prices aren't sending Sukuk issuance skyward”.

 

S&P Global Ratings Global head of Islamic finance Mohamed Damak said: “The complexity of Sukuk issuance, uncertainty regarding US Federal Reserves' policy revisions, and the government's efforts to reduce financing needs in response to weak oil prices have and will continue to weigh on Sukuk market activity.”

He said while governments affected by the price drop are looking to spending cuts, taxation, and the privatisation of state companies to adjust to the new reality, their financing needs remain significant.

"Part of these needs will be met by conventional debt markets and, to a much lesser extent, the Sukuk market, with the complexity of Sukuk issuance remaining a key deterrent to tapping the market, in our view," Damak said. 

At the same time, he believes the European Central Bank's quantitative easing programme and the entrance of a few new issuers to the Sukuk market will continue to support issuance volumes.

(The Star Online / 04 July 2016)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

China Turns To Islamic Finance To Drive Economic Initiative

In 2013, Chinese President Xi Jinping unveiled the Silk Road Economic Belt and the 21st-century Maritime Silk Road initiative now known as One Belt One Road, (OBOR) in order to actively develop connectivity and economic cooperation with countries mainly between China and Eurasia. The initiative aims to build a community of shared interests, destiny and responsibility with mutual political trust, economic integration and cultural inclusiveness. Initiating investment and developing economic trade communications with Islamic countries is one of important components of the OBOR strategy and this is detailed in the "Vision and Actions on jointly building the Silk Road Economic Belt and 21st-century Maritime Silk Road" published by the government on 28th March, 2015 ("Vision and Actions").

Compared to traditional financial products, Islamic finance has developed significantly due to its high flexibility of business, low risk, low debt requirements and the need to use real estate as collateral. In 2014, Sharia compliant financial institutions represented approximately 1% of total world assets, at around US$2 trillion. The latest study shows that, by 2020, the value of the global Islamic financial market will rise to US$3.25 trillion.

Financial integration is one of the key areas of cooperation set out in the Vision and Actions. The Chinese government emphasises that financial integration is a crucial element in the construction of the OBOR and has decided to speed up the incorporation and operation of the Silk Road fund. Proposals to strengthen the practical cooperation of China-ASEAN Interbank Association and to carry out multilateral financial cooperation in the form of syndicated loans and bank credit has also been completed. Qualified Chinese financial institutions and companies are encouraged to issue bonds in both Renminbi and foreign currencies outside China, and use the funds raised to invest in countries along the OBOR.

As background to the strategic execution of the OBOR, State Owned and private enterprises in China are also trying to make use of Islamic finance, as against traditional finance, to serve their own overseas development. Chinese banks are strengthening their cooperation with Muslim countries, and are busy developing their overseas business and outbound investment. Islamic finance is rapidly becoming an established channel for China to enlarge its overseas economic influence.

Issuing Islamic securities is an important mechanism for Chinese enterprises to raise funds and expand in Muslim countries. Although Islamic finance does not offer interest, there are still opportunities to ensure financial benefits and remuneration primarily through issuing Islamic securities (Sukuk). Investors who purchase such securities would not obtain interest as an income; however, they could be given remuneration in terms of investment gains.

It has been reported that a High Speed Rail project in China is considering using Islamic securities to raise a fund for almost 30 billion Chinese yuan (US$4.7billion). If successful, this would be one of the largest Islamic securities fund ever raised. 

In addition, Hainan Airlines Group is planning to raise US$150 million for ship purchasing, and this could be the first such deal to be approved by the Islamic finance authorities. Hainan is also planning to raise offshore Islamic securities. Some large banks in China have been raising their influence in the Gulf countries indeed, three of these banks issued traditional securities on NASDAQ Dubai, while others are in the planning stages. 

Country Garden, the Chinese mainland real estate agents announced their intention in October 2015 to issue Islamic medium-term notes with a nominal value of MYR1.5 billion (US$340million) through their wholly-owned subsidiary in Malaysia. This is the first case of the Chinese real estate sector raising funds offshore through Islamic finance mechanisms.

Apart from issuing Islamic securities, local Chinese government authorities and enterprises who need to raise funds will do so in Islamic countries with substantial oil capital, fundamental infrastructure and energy projects such as coal, chemicals, wind power and solar generation. These are in compliance with the investment preference of the Islamic finance system on projects with long term, low risk, steady income and the "Go Abroad" strategy of Islamic countries as part of their financial globalization. This has highlighted efforts through the promotion of local development of China to absorb foreign investment and maintain local stability.

However, we must also note that due to the characteristic of Islamic finance, and how it differs from traditional finance, there are numerous difficulties and challenges Chinese enterprises would have to face when using this structure. Unfamiliarity with the Islamic finance process is the prime issue for Chinese enterprises compared with traditional finance. Islamic finance, as a special financing system, has to follow the teachings of Islam, and as such certain areas are forbidden including the payment of interest, speculation, investments in alcohol and gambling, and both risk and interest share. In order to fully use Islamic finance, Chinese enterprises must learn the fundamental system and regulation that govern this financing mechanism and understand it business practices

Constraints on current policies and systems also have an impact on China's development of Islamic finance. In 2009, the Bank of Ningxia was approved as a trial centre for Islamic banking business, and is the first bank in China to do so. There was a further suggestion that Ningxia could be developed as a pilot region of financial cooperation between China and the Gulf states, becoming the Islamic finance centre of China, like Dubai in the Gulf and Kuala Lumpur in Malaysia, however, this has not yet been finalised by the government. One likely reason for this is the unique nature of Islamic finance which makes it very difficult to merge into the current financing management system in China. Under the OBOR, China is considering using Islamic finance as a breakthrough to initiate extensive business communication and project cooperation in many areas with Middle East and South East Asian countries. It is considering opening outbound Islamic financing institutions, and participating in the investment in these regions or developing enterprises which operate through Islamic financing products. This is not only safer for funds and better for comprehensive income, but also improves the long term benefits.

Following the initiation of the OBOR it is now developing the practical stages, and there will be a significant increase in the use of Islamic financing tools and investment in major construction projects. If the Chinese government could enhance its cooperation with Muslim countries through Islamic finance, that it will significantly progress the development of the Silk Road project.

About Mr Du, Baozhong

Mr. Du is a senior legal counsel in the Beijing office of Yingke Law Firm. After graduating from China University of Political Science and Law with a master degree, he had been working for the Department of Treaty and Law in China's Ministry of Commerce for 13 years, and was engaged in legal consulting work in a large-scaled state-owned enterprise. Mr. Du, as the delegation member of Chinese Government, has participated in the working group meetings held by the Commission on International Trade of the United Nations several times, and addressed as the Chinese representative on meetings of OECD and APEC. He is specialized in foreign direct investment, outbound investment, international trade, private equity, venture capital, mergers and acquisitions, foreign-related arbitration, labor law, etc.

About Ms. Li, Xuan

Ms. Li is working as a trainee in the International Legal Affairs Department of the Beijing office of Yingke Law Firm, and also acts as the coordinator of Yingke Brussels Office. After graduating from Dalian Maritime University with a bachelor degree in Maritime Law, and a LLM Maritime Law degree at Bentham House, Faculty of Laws, University College London. She used to work in-house in an international shipping company, responsible for marine insurance and admiralty laws. While working in the UK, she served as the assistant analyst for hedge funds at Thomson Reuters London. Her specialisations are maritime law, international trade law and international arbitration.

(Zawya / 09 June 2016)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
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