Friday, May 28, 2010

Malaysia sovereign sukuk issued for $1.25 billion, Dubai, Islamic repo

Malaysia sovereign sukuk
The big news of the day was Malaysia's latest foray into the sukuk markets, the first by the sovereign since 2002 when it issued $600 million in sukuk. The latest issue was expected to be $1 billion, but with an order book reported to be between $4 billion and $5.5 billion, the issue was increased to $1.25 billion. The pricing, expected to be 180-190 basis points over US Treasuries of similar maturity, came in at 180bps on the low end of the range. This is the largest sukuk issuance since Dubai's $1.25 billion issuance in October 2009 before the Emirate saw its government-related entities like Dubai World run into trouble servicing its debt. Along the trend of the post-AAOIFI ruling market, this was an ijara sukuk which has become the most common form of sukuk issued since the rules on mudaraba and musharaka were strengthened to be more restrictive. In the first day of trading, the yield narrowed as investors bid up the sukuk. The sukuk was issued at 3.93% and finished its first trading day yielding 3.87%, 171bps higher than US Treasuries, a narrowing of the issue spread by 9bps. The state-owned oil company Petronas has seen its 4.25% sukuk issued last year trading with a 2.07% yield, which is in line with the historical spread between the sovereign and state-owned company's yields.

Prior to the issue, I was concerned that there would be too little trading to provide guidance as the economic and interest rate environment in Europe and globally evolved, but it appears that there is already secondary market activity, which should allow this sukuk to serve as a useful benchmark for corporate sukuk issuance (at least within comparable maturity range, denominated in US Dollars and issued by Malaysian issuers). As I mentioned, the issuance of another 5-year sukuk does little if anything to provide a lead for issuers looking to issue longer-dated sukuk, which are an important need for takaful providers and other investors looking for long maturity assets. However, with the difficult financing market globally because of worries about the fate of the Eurozone as well as continuing concerns over sukuk defaults, it is good sign that Malaysia's sukuk offering received such strong interest. We will have to wait another day for a sovereign sukuk with a 10-, 15-, 20- or 30-year tenor.

In another hit to Dubai's reputation, cooling company Tabreed missed a periodic payment on its AED1.7 billion ($462.8 million) sukuk. The company is currently working on a recapitalization plan. The restructuring plan includes not just this sukuk, but debts totaling $1 billion. The two largest holders of the sukuk who collectively own more than 50% of the sukuk were consulted before the missed payment and one, Mubadala, provided an AED 1.3 billion facility to Tabreed as part of the recapitalization. The company expects to make a payment due in July on its $200 million floating rate sukuk.

Dubai International Capital, a private equity unit in Dubai Holding, is requesting a three-month delay on repayment of some of its debts. In an article, Noor Islamic Bank CEO Hussain Al Qemzi says the bank continues to expect to achieve profitability by 2012. He also said that Dubai Holdings is not another Dubai World and that Noor Islamic Bank has a small exposure to Dubai Holding, which owns Dubai International Capital.

In a case of "less bad" news, builder Arabtec says Nakheel is not in arrears to the company "as much as some analysts fear". That is hardly a ringing endorsement for efforts by Dubai to bring Nakheel current with many of its trade creditors.

Islamic repo and liquidity management
In what potentially could be a significant development, the UAE central bank is planning to offer daily auctions of commodity murabaha with one week to one year maturity to help Islamic banks manage liquidity. The Islamic certificates of deposit would fill an important gap in the Islamic finance industry where short-term liquidity management tools are rarely offered by central banks. The daily auctions would provide an important datapoint for investors and Islamic bankers. The central bank also anticipates using these CDs to manage liquidity through repurchase (repo) agreements, along the lines of the short-term ijara sukuk issued by the Central Bank of Bahrain. The difference between an ijara sukuk and a commodity murabaha is that one represents ownership of an asset while the other creates a debt stream that may raise Shari'ah issues over its use in a repurchase agreement. However, these issues have probably already been reviewed by Shari'ah scholars. The need for liquidity management tools for Islamic banks and central bankers, however, may be so important that their presence, even where this is viewed with some skepticism, may outweigh the cost associated with a controversial application.

Other News

  • Moody's showed up a little late with a report that the Investment Dar case against Blom Bank where TID was allowed to proceed to trial claiming that a wakala agreement should be voided on the basis of non-Shari'ah-compliance presented an "operational risk" to Islamic finance.
  • Malaysia's central bank and Securities Commission are working on a plan to make Malaysia a center for non-ringgit-denominated sukuk, as well as other areas within Islamic finance. Previously, there has been a lot of development in sukuk markets denominated in ringgit with fewer non-ringgit issues. This is in contrast to the GCC where issuers have brought both local currency and US Dollar sukuk to market.
  • Saudi Electric Company, which has issued several domestic sukuk, plans to tap the international sukuk markets in 2011.
  • The Australian government is reviewing its tax laws to put Islamic finance on equal footing with conventional finance and the assistant treasurer Nick Sherry points out that Islamic finance can have a broader appeal besides just Muslims as a form of socially-responsible investment (SRI). If it wants to attract the SRI consumer base, however, I believe Islamic finance will have to move beyond just 'negative' screens and incorporate 'positive' screens for companies that contribute to the social good.
  • The latest summary of the Dow Jones Islamic Indexes is available through the end of May.
  • Jordan Dubai Islamic Bank began trading on the Amman stock exchange.
  • Malta continues to examine how regulations need to be adapted to incorporate Islamic finance.
  • S&P put Kuwait Finance House's long-term counterparty credit rating on Credit Watch Negative.
  • The first Islamic bank in Tunisia, Azzitouna Bank, was launched on Friday.
  • The Gulf Bond and Sukuk Association signed a memorandum of understanding with the Trade Association for the Emerging Markets (EMTA).
  • There is a summary of tax legislation on Islamic finance in South Africa.

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