Sunday, February 23, 2014

First ever sukuk by anb exporrt-import bank

By Datuk Adisadikin Ali & Syed Alwi Mohamed Sultan


In December 2011, the central bank of Malaysia issued its Financial Sector Blueprint 2011-2020, in which it clearly identifies several recommendations for the “Internationalisation of Islamic Finance”. Among the recommendations is to encourage Malaysian issuers to offer foreign currency Islamic capital market investment products and to facilitate regular sukuk issuance by the government and government- linked companies. This is the inspiration behind the establishment of Export-Import Bank Malaysia Bhd’s (Exim Bank) US$1 billion (RM3.3 billion) Multicurrency Sukuk Issuance Programme under the special purpose vehicle, Export- Import Sukuk Malaysia Bhd.

On Feb 19, 2014, the first sukuk series from the programme was issued to the market marking the introduction of the world’s first ever sukuk to be issued by an export-import bank. It is also the first US dollar-denominated sukuk for 2014, hence making it the second consecutive year running where a Malaysian issuer has opened the accounts of international sukuk issuance.

Exim Bank Sukuk Structure

In designing the sukuk structure for Exim Bank, two key considerations were central to the thinking process — size and availability of tangible assets. This is to ensure that the structure of the sukuk complies with what is the “generally accepted principle” of Shariah-compliance and is a tradable sukuk in the secondary market. Eventually, a hybrid structure was decided upon on the basis of wakala principle to acquire a pool of assets comprising a combination of ijara contracts, qualifying sukuk and a commodity murabahah investment.

Three parties are involved in the entire structure — Exim Sukuk Malaysia Bhd (the “Issuer” and “Trustee”), Exim Bank (the “Wakeel”) and the sukukholders. On the issue date of the sukuk, the sukukholders subscribe to the sukuk and pay the issue price in respect of the sukuk (“issue price”) to the Trustee.

The Trustee in accordance to the provisions provided under the wakala agreement, are allowed to use the issue price for the following purposes:

• Use a portion, not less than 34% of the issue price for the purchase of a portfolio of tangible assets from Exim Bank; and

• Use the remaining amount of the issue price, being no more than 66% of the issue price to purchase a portfolio of non-tangible assets from Exim Bank; or to invest that amount, that is, no more than 66% of issue price, in the purchase of commodities from Bursa Suq Al-Sila’ and to sell such commodities to Exim Bank on a deferred payment basis (the commodity murabahah investment).

Pursuant to the above, the Wakeel will be required to ensure that tangible assets fulfill the tangible ratio requirement of not less than 33% at all times during the tenure of the sukuk.

The tangible ratio requirement refers to the ratio of tangible assets against the value of the wakala venture, which consists of the aggregate value of the tangible assets, non-tangible assets and / or the commodity murabahah investment. Notwithstanding the above requirements, for the first series of the sukuk issuance amounting to US$300 million, the ratio of the issue price used for the purchase of the tangible asset portfolio was 51% to give a healthy buffer against the requirement of 33%.

The Wakeel will manage the wakala portfolio of assets and ensure that the revenues from the portfolio of assets are used to fund the periodic distribution amounts payable by the Trustee to the sukukholders at each periodic distribution date.

Exim Bank Issuance Details

The landscape of global financial markets changed dramatically following the tapering of quantitative easing (QE) by the US Federal Reserve (Fed) since June 2013. With the expectation of an improvement to the US economy — official data show higher than expected growth of 3.2% in the fourth-quarter of 2013 — the Fed decided since June 2013 to gradually reduce its bondbuying programme with a target of ending it entirely by mid-2014.

The new Fed chairwoman, Janet Yellen, in her maiden speech to the US House of Representatives on Feb 11, 2014, reiterated the course of tapering the QE when she said “if incoming information broadly supports the committee’s expectation of ongoing improvement... the committee will likely reduce the pace of asset purchases in further measured steps at future meetings…”

Some emerging markets such as South Africa and Turkey, in early 2014, countered the outflow of liquidity by hiking interest rates to shore up their currencies. The outflow of liquidity and rise in interest rates were a fusion that resulted in increased yields in US Treasuries and bond markets globally. The benchmark five-year US Treasury yield started the year 2013 at 0.76% and ended the year close to 100 basis points (bps) higher, at 1.75%.

Issuers were like treading on eggshells when considering raising funding from the global capital markets.

With this backdrop, the successful pricing of the Exim Bank sukuk was a welcome relief and vindication of the confidence of global market investors to Malaysia’s economy. The Exim Bank sukuk received strong investor demand.

The sukuk was oversubscribed by approximately 10 times attracting approximately US$3.2 billion orders and was fully distributed to over 185 Islamic and conventional investors. The allocation was well-spread out globally with over 19% of the issue distributed to the Middle East investors, 65% to Asian investors and the remaining 16% to European investors.

The breakdown of investor type showed that approximately 42% was subscribed by asset managers, 30% by banks and private banks, 16% by central banks and sovereign wealth funds and about 10% by insurance and pension funds. The strong demand from the investors, allowed the sukuk to be priced at the tighter end of final price guidance at T+140 bps following an initial price guidance of T+165 bps area, which is equivalent to an all-in yield of 2.87% per annum.


In view of Exim Bank’s raison d’etre — to provide credit facilities to finance and support exports and imports and to facilitate the entry of Malaysian companies to new markets — the establishment of the sukuk programme is another building block towards achieving Exim Bank’s mandate. In a global financial world which is prone to frequent crisis and volatilities, access to liquidity at optimal cost and diversification of the sources of liquidity are key strategic objectives.

The sukuk market has proven to be a practical source of funding and the spectacular growth of the sukuk market is vindication of the viability of sukuk as an alternative source of liquidity. To that end, the establishment of the US$1 billion Multicurrency Sukuk Issuance Programme by Exim Bank and the first issuance off the programme is a key milestone for Exim Bank and Malaysia, towards achieving the objective of internationalisation of Islamic finance and becoming a global Islamic finance hub.

Datuk Adissadikin Ali is the president and CEO of Export-Import Bank of Malaysia Bhd.

Syed Alwi Mohamed Sultan is the MD and head of Islamic Banking, Asia Pacific for BNP Paribas Malaysia Bhd.

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