Thursday, May 20, 2010

Malaysia sovereign sukuk, Dubai World debt settlement, WIEF

Malaysia sovereign sukuk
The basics of the coming Malaysian sovereign sukuk were officially released (although the total size has not been except that it will probably be larger than the $600 million issue in 2002). The proposed sukuk received an initial rating from S&P is A-. The dollar-denominated global sukuk, issued by the government's SPV 1Malaysia Sukuk Global Bhd, will be a 5-year ijara sukuk will involve the sale and leaseback of 12 hospitals according to the CEO of HSBC Amanah, Mukhtar Hussain. The government is meeting with prospective investors and will do so until May 27th and order-taking will begin a few days later.

One of the reasons for the issue, and the primary importance of the issue for Islamic finance, is that there are few sukuk issued (only one other by Malaysia) and they provide an important benchmark for corporate issuers. The five-year maturity is short, but it is in line with the most common maturity of sukuk, so near term it will be relevant to create a pricing benchmark for short-term sukuk. However, it does not establish a sovereign benchmark for longer-term sukuk, which would have been noteworthy. However, with the European debt crisis in full swing with the yield premium for new issues (e.g. Spain today) rising, the fact that the sukuk is likely to be issued blunts some criticism of its 5-year tenor. If Malaysia wanted to continue to help the global Islamic finance industry, it should follow this 5-year sukuk with a 10- or 15-year sukuk to establish a pricing benchmark.

One concern remaining is that the sukuk will be issued in a time of rising yields among sovereign borrowers as a result of the European debt crisis and this could establish a benchmark yield higher than what might have been received six months ago or six months from now. Therefore, the Malaysian government should make an effort to ensure that this sukuk is tradable in a liquid market (Malaysian sukuk secondary markets are less liquid than conventional bond markets but more liquid than most sukuk secondary markets). That would allow secondary market activity to price the changes in a 5-year sukuk sovereign yield that would provide more transparency for pricing future corporate issuers.

Dubai World agreement
The Dubai World debt agreement surrounding $24 billion in debt has been reached in principle. The FT Alphaville blog posts the entire press release with the table describing the terms. The repayment will total $14.4 billion ($0.60 on the dollar), split into two tranches. Each tranche will be allocated pro rata to the debt claims. Tranche A will have a five-year maturity at 1% interest. Tranche B will have three options, the first two will be available for holders of USD denominated debt, while the third will be available for holders of AED denominated debt. Tranche B will have a longer maturity with shortfall guarantee for 1/2 of the $10 billion size. The interest rate will again be 1% except for AED-denominated debts when the 1% will have EIBOR-LIBOR up to 1% added in.

While it is not clear whether the debt covered will include Shari'ah-compliant debt, it does puts some firm numbers on the outcome for these lenders compared with holders of the 2010 and 2011 Nakheel sukuk, who have or will receive full repayment of all principal plus profit. Last weekend, I addressed my concern that this differential treatment could negatively affect the ability and willingness of conventional issuers to also issue sukuk and the numbers, I think, make this concern even more relevant.

World Islamic Economic Forum

  • Speaking at the WIEF, Prince Andrew said that the UK, and London in particular, will continue to build on its status as the largest Western hub for Islamic finance.
  • The new UK government may reconsider a sukuk if the value-for-money can be demonstrated; that is, will the additional source of demand and encouragement for the Islamic finance work within London offset the additional structuring costs. Assuming tax laws are changed, the UK's first corporate sukuk could be issued this year, according to Humphrey Percey, the CEO of BLME.
  • The Malaysian central bank, Bank Negara, has established programs to educate other central banks on regulating Islamic finance.
  • The executive vice chairman of Ithmaar Bank, Khaled Abdulla-Janahi, said that there is need for greater education among Muslims about Islamic finance and says that the history of Islamic finance in the future may regard Gordon Brown, for his work as finance minister of the UK, and Christine Lagarde, the current French finance minister, as the two biggest drivers of growth in the Islamic finance industry.
  • Five memoranda of agreement worth $125.3 million were signed at the WIEF.
  • The CEO of Maybank MEACP Pte Ltd, Mumtaz Khan, suggests a G3+3 group to work with the G20 to develop Islamic finance. The parties involved would be the three G20 members with Muslim majorities, Saudi Arabia, Indonesia and Turkey, in addition to Malaysia, the World Islamic Economic Forum and the Islamic Development Bank.

Other News

  • Rushdi Siddiqui continues his excellent line of articles in Gulf News with one on the need for a global Islamic sovereign wealth fund.
  • The head of the DFSA warns that forcing Islamic financial institutions to operate under the same regulatory rules as conventional financial institutions could hurt its growth prospects.
  • The governor of the Reserve Bank of India says that Islamic banking cannot be licenses under current regulation, but it is still exploring whether Shari'ah-compliant non-banking financial institutions are possible.
  • Qatar Islamic Bank is planning to sell as much as $750 million in its first sukuk issuance. The sales of sukuk so far have risen year on year at the fastest rate since 2007 (albeit from a low base) as yields have fallen more than emerging market debt.
  • Lipper Research describes the performance of Islamic equity funds by investment area and geographical concentration. 45% of all funds are in Southeast Asia while 59% of total assets in Islamic funds are in the GCC.
  • Dubai Islamic Bank has launched a new unsecured consumer lending product based on a salam contract with the commodity used being sugar. As I understand it, the bank would provide financing and the customer would be obligated to deliver a given amount of sugar (incorporating a markup) at the maturity. The transaction involves a sugar wholesaler that collects partial payments from the customer and at maturity will deliver the sugar to DIB.
  • The Commercial Real Estate Sukuk (Kuwait) for $100 million was paid on its maturity date.
  • Ireland hopes to attract Islamic financial institutions and Islamic funds to the International Services Centre in the country.
  • The president of CIMA writes in an opinion article in The Australian newspaper that Islamic finance has significant growth potential but is still hampered by a lack of people skilled in understanding the requirements for Islamic financial products.

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