Malaysian takaful operator Etiqa Takaful on May 30 issued the world’s first sukuk from the takaful sector amounting to 300 million ringgit (US$93 million).

The 10-year offering, callable after five years, offers a yield of 4.52%, which, according to KFH Research, is at least 23bp lower than the returns offered on identically-rated tier 2 sukuk issued by Malaysian Islamic banking institutions.

Indeed, the main challenge for this transaction, being the first of its kind globally, was to obtain competitive pricing. With Basel III regulation on capital components coming into effect early last year, more issuances of Basel III-compliant capital instruments have taken place in the Malaysian debt capital markets.

Among these issuances were Maybank’s 1.6 billion ringgit tier 2 subordinated notes and Maybank Islamic’s 1.5 billion ringgit tier 2 subordinated sukuk. These have saturated the market with Maybank Group’s debt paper and set a challenging pricing benchmark with investors’ preference to subscribe to Basel III-compliant capital instruments given the higher yield compared to Basel II-compliant capital securities.

The deal was structured on a musharaka (partnership) contract and the sukuk qualifies as a subordinated tier 2 capital instrument. Etiqa intends to utilize the proceeds to fund its business operations, working capital and other Shariah-compliant corporate purposes.

The musharaka structure was selected for this landmark transaction for its simplicity, cost efficiency and investors’ familiarity in the Malaysian sukuk market. The structure also does not require the issuer to commit a pre-identified tangible asset.

The sukuk were oversubscribed 1.75x and were sold to Malaysian investors with 65% of the paper allocated to asset managers, 26.7% to government agencies, 5% to corporates and 3.3% to financial institutions.

Maybank Islamic was the Shariah adviser to the transaction, while Maybank Investment Bank acted as the sole principal adviser, lead arranger, lead manager and facility agent.

KFH Research considered the sukuk as a unique offering in a sector where typically insurance companies and takaful operators are investors in bonds and sukuk market instruments as opposed to being issuers. It says the issuance sets precedence in what could become a new growth sector for the global sukuk market as other takaful operators could be encouraged to issue sukuk instruments to fund their liquidity and capital requirements.