Malaysia sold the longest-dated sovereign sukuk ever when it priced on April 15 a dual-tranche offering totaling US$1.5 billion, over-coming in the process the country’s economic challenges.

The deal comprised of US$1 billion 3.043% trust certificates due 2025, which were priced at a spread of 115bp over the US treasuries. This was at the tight end of the revised price guidance of between 115bp and 120bp, and 20bp inside of the initial guidance of 135bp area.

The other tranche was a US$500 million 4.236% trust certificates due 2045 – the first ever 30-year tenor for a sovereign sukuk - which were priced at a spread of 170bp over the US treasuries. This was also at the low end of the final guidance of between 170bp and 175bp, and 15bp tighter than the initial guidance of 185bp area.

A Ministry of Finance statement says the pricing at the tighter end of the revised price guidance reflects the investors’ confidence, strong external position, monetary flexibility, fiscal sustainability as well as the diversified and competitive Malaysian economy. This comes as Malaysia faces pressing external challenges such as the lower crude oil prices and the normalization of the US Federal Reserve monetary policy.

In January this year, Fitch Ratings affirmed its negative outlook on Malaysia, reflecting the erosion of its current account surplus and large public sector deficits and the drop in oil prices. Commenting on the latest sukuk, Fitch Ratings’ head of Asia-Pacific sovereigns, Andrew Colquhoun says “the demonstration of market access is not in itself a rating strength as it is something we tend to assume for most sovereigns most of the time”.

He adds: “External liquidity remains a central credit concern behind Fitch’s negative outlook. The 19% drop in Malaysia’s foreign reserves in the 12 months to end-March 2015 is the third highest in Fitch-rated emerging Asian sovereigns behind Mongolia and Sri Lanka. Moreover, the decline would have been even higher without Petronas’ US$5 billion bond issue in March. The International Monetary Fund has just warned in the global financial stability report that the eventual rise in the US interest rates risks triggering a sharp deterioration in emerging market funding conditions.”

Global sukuk

The latest deal, issued through a special purpose company Malaysia Sovereign Sukuk Berhad, was Malaysia’s fourth US dollar-denominated sovereign global sukuk issuance following its successful debut in 2002. It employs a structure utilizing Shariah-compliant commodities, leasable assets and non-physical income-generating assets (in the form of rights to participate in the provision of services) – the world’s first for a sovereign sukuk.

The issuer will enter into a wakala agreement with the Malaysian government and under the arrangement, it will enter into an asset sale and purchase agreement for not less than 26% of the issued amount, a grant of rights to services agreement for no more than 26% and murabaha agreement (sale financing) for not more than 48% of the issued amount with Malaysia.

Proceeds from this offering will be used to redeem the US$1.25 billion trust certificates issued by 1Malaysia Sukuk Global Berhad due in June 2015, as well as to finance development expenditures.

The transaction was successfully priced following a global investor roadshow across key financial centres in Kuala Lumpur, Hong Kong, Singapore, Abu Dhabi, Dubai, London and New York. It attracted an aggregate order book of over US$9 billion from a combined investor base of more than 450 accounts.

The 10-year tranche was 7x over-subscribed and was distributed 50% in Asia (including 28% in Malaysia), the Middle East 24%, Europe 16% and the US 20%. By type of investors, fund managers bought 34%; sovereign wealth funds, central banks and supra-nationals 27%; banks 23%; pension funds 12%; insurance companies 3%; and private banks 1%.

The 30-year sukuk were about 6x oversubscribed with 50% sold in Asia (including 15% in Malaysia), 29% in the US, 19% in Europe and 2% in the Middle East. Fund managers were also the biggest buyers with 45%; sovereign wealth funds, central banks and supranationals 17%; insurance companies 17%; pension funds 12%; banks 5%; and private banks 4%.

CIMB Investment Bank, HSBC and Standard Chartered were the joint bookrunners and lead managers for the transaction.