The $600 million, five-year floating rate deal, for which HSBC was the sole bookrunner, pioneered an innovative structure that was designed to appeal to both mainstream and Islamic investors who are restricted by Sharia law which forbids the receipt or payment of interest.
The deal involves the use of a special purpose vehicle, Malaysia Global Sukuk, to purchase land parcels from a statutory body. The land is then leased back to the government. Investors purchase rated trust certificates (sukuk) from the SPV for the duration of the lease and receive periodic payments that are met with rental income from the government to the SPV of an amount equal to six-month dollar Libor plus the sovereign's spread.
Investors therefore receive regular payments that are comparable to coupons but are Shariah compliant since payment comes from the lease. The principal is repaid on expiry of the trust certificates through the government repurchasing the land at the agreed exercise price, which is a sum equal to the issue size of the trust certificates.
The pricing of the deal was based solely on the sovereign spread to six-month Libor with no reference to property prices or the performance of the underlying asset pool.
The deal attracted an order book of about $1.1 billion and was increased in size from $350 million to $600 million, the maximum permitted under the sovereign's 144a filing. Surprisingly, given the volatility that afflicted spreads on Malaysia's outstanding issues following prime minister Mahathir Mohamad's shock on-off-on resignation, the deal also priced at the tight end of the 95 to 98 basis points indicated range. The deal was rated Baa2 by Moody's and BBB by Standard&Poor's.
The pricing was helped by Moody's announcement the day before the issue that it had placed Malaysia's foreign currency ratings on review for a possible upgrade. On that same day Moody's also placed six Malaysian banks and the national oil company Petronas on review for possible upgrades and announced the ratings upgrades of two other Malaysian banks.
HSBC was able to help the sovereign achieve its objective of broadening its investor base. About 50% of the deal went to investors in the Middle East, 40% to Asia, 16% to Europe, and 4% to the US. Of the 51 investors, the 27 who were new to Malaysian credit bought approximately 65% of the deal.
Middle East uncertainties
Targeting first-time Middle East investors created several challenges for the bookrunner. "We were initially unsure how Middle East accounts would respond," says Bryan Pascoe, HSBC's Asia Pacific head of debt syndicate. "Many Middle East investors had not participated in a US dollar global structure before and had little or no experience with the Malaysian credit." To help in the marketing, HSBC involved five Middle East co-managers (ABC Islamic Bank, Abu Dhabi Islamic Bank, Dubai Islamic Bank, and the Islamic Development Bank) and three Asian co-managers (Standard Chartered, Bank Islam Malaysia and Maybank).
Islamic finance experts see the Malaysia deal as a big step forward. "It's a very significant development", says one Dubai-based Islamic finance professional. "There's been privately placed paper before, and Bahrain has paper that's traded but none of that has been rated by the agencies. This structure has more appeal for mainstream investors and is also certified by the International Islamic Financial Markets Organization."
According to Iqbal Khan, chief executive of HSBC Amanah Finance (HSBC's Islamic Bank), Malaysia has contributed much to the development of Islamic finance and the government has worked hard to promote its use in the local debt market.
"Malaysia is a major centre for Islamic financing and the government is very clear in its strategic thinking. Over 60% of new domestic debt issues in Malaysia are now Sharia compatible," he says. Islamic bonds made up about 43% of all private debt securities issued in Malaysia last year, a dramatic increase from the 3% of 1998.
Now that Malaysia has found a structure that is acceptable to mainstream international bond investors and is also compliant with Islamic financing principles, the question remains whether more issuers from the Middle East and the Islamic world will follow.
"We hope so," says HSBC's Khan. "The door has been opened for more progressive and innovative issuers to take advantage of the international capital markets."