Sukuk Market 3Q11

8/3/2019 Sukuk Market 3Q11

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Debt Market Research TeamTel :(603) 9280 2180(603) 9280 2164

E-mail :[email protected]

SUKUK MARKET HIGHL IGHTS

The sukuk market in 4Q11 unfolds with issuance of a 3-year benchmark

offshore RMB500m sukuk by Khazanah through Danga Capital. Despite the

current volatility in the global markets, the sukuk drew a demand of 3.6x

book size, which prompted Khazanah to increase the deal from the original

RMB300m to RMB500m. This landmark transaction is the world’s first Emas

sukuk denominated in RMB, and could pave the way for other companies to

tap the offshore yuan market.

Despite the Arab Spring turmoil, sukuk issuance has been encouraging

globally. MENA region contributed 16% of the total sukuk issued in 3Q11;

led by UAE at US$1.69bn issuances. For sovereign, Bahrain and Indonesia

are on the w ay to issue US$1bn sukuk each in 4Q11. Likewise, the Islamic

Bank of Thailand plans to offer 5bn baht sukuk before year-end. With the

escalating demand for better infrastructure needs in Asia, we foresee that

more project-financing based on sukuk will be issued in the future. For

instance, in Saudi Arabia, SATORP is issuing a US$1bn sukuk to build their400,000 barrel-a-day export refinery in Juba il.

Notably, the conventional bank Goldman Sachs also show ed interest w ith

Islamic finance through its Cayman-Islands registered Global Sukuk

Company Limited. It is reported that Goldman Sachs will issue a US$2bn

murabaha sukuk to be listed w ith the Irish Stock Exchange.

For the local PDS market, 3Q11 witnessed PDS trading volume gaining

momentum w ith a 13% increases QoQ at RM17.4bn trades done. From the

regulatory perspective, Securities Commission (SC) has issued new Sukuk

Guidelines effective 12-Aug-11. The new guideline facilitates several

important areas in the sukuk process; aimed to enhance the regulatory

framework and efficiency of the sukuk market.

This year, the local bond market w itnessed several rating downgrades in

the CLO sector, where several obligors have defaulted and undergone

restructuring. This, together with the global subprime collapse may prove

that CLO financing carries high and uncertain risks on the value of the

underlying assets. In relation thereto, this paper will highlight the

characteristics of underlying assets in the Islamic contracts and its

fundamental features based on shariah.

Debt Marke t Resear ch

Sukuk Marke t V i ew po in t

Khazanah issued first Renminbi Sukuk; New SukukGuidelines I ssued by SC

M a l a y s i a

RHB ResearchInstitute Sdn Bhd

A member of theRHB GroupCompany No: 233327 -M

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Revised I s lami c Secur i t ies Gu ide l in es ( Sukuk Guide l ines)

Effective 12-Aug-11, the new guideline replaces the Guidelines on the Offering of

Islamic Securities 2004. The revised guideline provides greater clarity to ensure

compliance of shariah rulings and principles endorsed by the Shariah Advisory

Council (SAC) of the SC.

The guideline emphasised that the naming of sukuk shall not be misleading. Where

the sukuk is structured using a single shariah principle, the sukuk shall be named

according to its underlying shariah contract. In the case where the sukuk is

structured using multiple shariah principles, the sukuk shall be named according to

the name of the issuer or obligor, sukuk istithmar (investment), or any other names

based on principles or concepts endorsed by the SAC from time to time where

appropriate.

Notably, the guideline expedites time-to-market for the issuance by expanding the

deemed-approval process to a wider scope of highly-rated issuers. A proposed

ringgit-denominated sukuk will be deemed approved by the SC if it has either been

assigned a local rating of AAA, an international rating of at least BBB (or equivalent),or a regional rating of AAA by an international credit rating agency provided all

documents required are submitted and all relevant requirements are met under the

guidelines.

For foreign-denominated sukuk originated in Malaysia to be deemed-approved, it

must be rated at least BBB- or equivalent; provided all documents required are

submitted and all relevant requirements are met under the guidelines.

Mandatory rating requirement is also removed for selected issues or offers. This

includes the irredeemable convertible Islamic loan stocks, foreign currency-

denominated sukuk, and sukuk that will be non-transferable and non-tradable whose

investors would not require a rating.

The guideline also gives greater disclosure to sukukholders to facilitate investment

decision-making process. Amongst others, issuers now have to disseminate the

latest annual audited financial statement in public domain. This is in tandem with the

Corporate Governance Blueprint 2011 issued by SC which emphasised the

importance of disclosure at a timely and readily-accessible manner. In view of this

matter, we hope non-financial statement such as corporate governance measures

are also to be disclosed in the future to contribute to a more efficient market.

Although according to some views, unlike shares, sukuk are not related to the public

thus rendering it unnecessary to disclose as much information. Nevertheless, it is

important to note that in Malaysia, sukuk are traded in the secondary market and

will reach the public via fund institutions like the Employees Provident Fund,

Lembaga Tabung Haji and other asset management companies.

Deemed approved

“AAA” sukuk will

expedite time-to-market

issuance

Mandatory rating

requirement is removed

for selected issues

Latest annual financialstatement to be

available publicly



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3Q11 Loca l Suku k Mark e t Ove rv iew

The 3Q11 saw sukuk trading volume increase by 13% QoQ with RM17.4bn trading

done (2Q11: RM15.4bn). The trading interest concentrated on the “AA” segment at

41% trading share, followed by the “AAA” segment at 35% trading share. The 3Q11

macro-economic uncertainty involving U.S debt ceiling and Euro crisis has led to

flight-to-safety measures as investors flocked to the GRE-related papers. Other

sectors gaining tractions in the 3Q11 were power, toll and O&G as illustrated in the

chart below. Unlike conventional bonds, finance-related sukuk are scarce due to its

shariah limitations.

Chart 1: Local Sukuk Tr ading Market 3Q11 by Sectors

POWER

24%

TOLL

9%

O&G

8%

FINANCE5%

CONSTRUCTION

5%

TELCO

3%

OTHERS

9%

GRE

37%

Source: Bond Pricing Agency, RHBRI

Table 1: Ranking of Malaysian Sukuk by Trading Volume 3Q11

Issuer

OutstandingAmount(RM m)

TradedVolume(RM m)

Cagamas Dec-13 700 540Sarawak Energy Jun-26 800 533Sarawak Energy Jun-21 1,000 492Danga Apr-15 2,000 430PASB Jun-16 1,400 430Prasarana Aug-26 1,200 395Prasarana Aug-21 800 390Kencana Aug-16 500 372Aman Feb-23 200 300Prasarana May-23 500 290Simple Average 910 417

Source: Bond Pricing Agency

Sukuk trading volume

increase QoQ



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The 3Q11 new sukuk issuances were slow, with only 6 new approvals by Securities

Commission compared to 12 approvals in the 2Q11. The lower-than-expected

numbers are driven, amongst others, by the uncertainty in the macro-economic

outlook, which has caused companies to postpone their expansion and financing

activities.

There were no new Danajamin-guaranteed sukuk issued in the 3Q11. In tandem

with the new Sukuk Guidelines, there are 2 unrated sukuk, namely Promising QualitySdn Bhd and Chemical Company of Malaysia.

Table 2: Local New Sukuk Issuance 3Q2011

IssuerIssuance

DateFacility Structure Rating

FacilitySize

(RM m)Promising QualitySdn Bhd

1-Jul-11 IMTN CommodityMurabahah

NR 200

Adventa Berhad 20-Jul-11 ICP/IMTN Musharakah P1(BG)/AAA(BG)

150

Lafarge MalayanCement Bhd

26-Jul-11 ICP/IMTN Murabahah P1/AA2 350

Besraya (M) Sdn Bhd 28-Jul-11 Sukuk Mudharabah AA3 700

Kencana PetroleumBerhad

5-Aug-11 Sukuk Mudharabah AA3 700

Chemical Company of Malaysia

25-Aug-11 Sukuk Musharakah NR 120

AmIslamic Berhad 30-Sep-11 Sub-sukuk Musharakah A1 2000

TOTAL 4,220 Source: Securities Commission

4Q11 is expected to have higher facility amount issued, amongst others from the

RM5bn sukuk by Manjung Energy Island Berhad, the funding vehicle for TNB

Janamanjung.

Lower-than-expected

new issuances for the 3Q11



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Sub jec t Ma t te r as P i l l ar in I s lam ic Con t r ac ts

All sukuk structures have elements of contracts. Under Islamic law, the validity of a

contract depends on three main important pillars, namely i) the contracting parties;

ii) offer and acceptance; and iii) subject matter.

Most sukuk structures have identified assets backing. Nevertheless, there have been

some issues in identifying appropriate assets in the sukuk market. For instance,

investors have raised concerns that the proposed Nakheel’s US$1bn sukuk is backed

by un-reclaimed seabed, where the assets consist of a strip of waterfront land with

still partially submerged crescent. Such condition could raise governance and

operational issues in future in case of dispute.

Although different kinds of contracts have different asset backings, it shall have the

main characteristics as required by shariah. Amongst the main conditions for the

subject matter is that the asset must exist, valuable, usable, deliverable and legally

permissible under shariah.

The required elements are important to avoid gharar, which is prohibited in Islam.

Gharar literally means risk, uncertainty or hazard, which technically refers to

excessive uncertainty or mere speculative risk that can lead to undue loss. Many

classical examples of Gharar were provided explicitly in the Hadith, such as the sale

of fish in the sea, birds in the sky, an unborn. Meanwhile, some current business

transactions that contain gharar are gambling, securitisation of future cash flows,

forwards, futures and other derivative securities.

Gharar is prohibited to avoid exploitation and injustice in any form to any of the

parties of a contract. Hence, it requires that business transactions must be based on

transparency, accuracy, and disclosure of all necessary information so that no party

is at a disadvantage. This is in tandem with Islamic principles that promote the spirit

of brotherhood and cooperation in business relationships.

In addition to the conditions above, the asset must be something that can be

specified and quantified with regards to its essence, quality and value. This leads to

the determination of the asset’s price, which must be agreed and fixed at the time of

the contract being executed. Contracts which involve uncertainty in pricing are

considered invalid.

In buy and sell transaction, the seller must have ownership of the asset during the

execution of the contract. Ownership must remain with the seller until delivery is

made; where at this juncture ownership is transferred to the buyer along with the

risk and rewards attached to the asset.

Nevertheless, it is to be noted that the sale of non-existence goods are exempted in

Salam and Istisna’ transactions. In both transactions, specific and precise conditions

are determined upfront which will remove the element of gharar.



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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only toclients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad).It is for distribution only under such circumstances as may be permitted by applicable law. The opinions andinformation contained herein are based on generally available data believed to be reliable and are subject to changewithout notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as

a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation orsolicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything statedherein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claimwhatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in thesecurities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to theindividual financial circumstances and objectives of persons who receive it. The securities discussed in this reportmay not be suitable for all investors. RHBRI recommends that investors independently evaluate particularinvestments and strategies, and encourages investors to seek the advice of a financial adviser. Theappropriateness of a particular investment or strategy will depend on an investor’s individual circumstances andobjectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for anyloss or damage arising out of the use of all or any part of this report.

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