By
Datuk
Adisadikin Ali & Syed Alwi Mohamed Sultan
Introduction
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.
Conclusion
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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