China’s growing credit market to spill over into Islamic deals? (By IFN)

See: http://redmoney.newsweaver.co.uk/12pmp89o43vh38rwoni3wx?email=true&a=6&p=23052165&t=21032255

CHINA: The recent move by the Hong Kong government to proceed with draft amendments ultimately aimed at creating a fairer market between Sukuk and conventional bonds may prove astute as China sees further interest from Muslim markets as a source of funding.

Emirates NBD (ENBD), which issued a US$500 million Sukuk in January this year, has come to the market as the Middle East’s first issuer of Chinese yuan-denominated debt, dubbed dim sum bonds.
On the 21st March, the bank issued CNY750 million (US$119 million) three-year conventional notes, priced at 4.88%, followed by a CNY250 million (US39.54 million) tranche on the 24th March.
The issuance came on the heels of Malaysian sovereign wealth fund Khazanah Nasional’s US$357.8 million exchangeable Sukuk issuance on the 15th March. The Sukuk is convertible into shares of Khazanah’s Hong Kong-listed Parkson Retail Group.

Apart from Hong Kong’s draft amendments for Sukuk, China has also implemented a slew of measures aimed at gradually liberalizing its currency.
Its latest move involves the expansion of quotas for US dollar and Chinese yuan qualified foreign institutional investor schemes; and also includes a pilot program allowing offshore funds to raise Chinese yuan funding onshore for offshore investment. “If implemented, [this] would open up a new onshore-to-offshore cross-border investment channel,” said HSBC in a report on the 5th April.

As China loosens its grip on its currency and sees continued and growing foreign interest for funding and investments, it could just be a matter of time before the country entices more Islamic transactions; especially as entities seek more diversified funding in the wake of slowing credit from the west.

Malaysia’s Sukuk market faces stiff competition (By IFN)

See: http://redmoney.newsweaver.co.uk/1oaxu5tp8hah38rwoni3wx?email=true&a=6&p=22954875&t=21009325

GLOBAL: Malaysia is poised to retain the lion’s share of the global Sukuk market this year, but could the country see stiffer competition from its neighboring Asian countries?
According to Herwin Bustaman, the head of HSBC Amanah Indonesia, Indonesia is most likely to see record Sukuk issuance this year with another US$1.5 billion sovereign Sukuk issuance, on top of US$1.5 billion already issued in March. The second sovereign sale is expected in the second half of this year.

In addition, he said that: “For the first time, we think Indonesia will see one or two corporates issue the country’s first US dollar-denominated Sukuk.” He noted that this is now possible following the country’s new tax and Sukuk laws, which allow for the issuance of US dollar-denominated Sukuk by corporates; and enables local companies to reach out to investors in the Middle East.

Meanwhile, although Malaysia is forecast to issue 60% of the US$44 billion-worth of Sukuk HSBC projects to be offered globally this year, other Asian countries are also proactively marketing themselves to boost their standing in the lucrative Sukuk market. One notable and new player to the fore is Hong Kong.

"Hong Kong has issued a consultative paper on Sukuk laws seeking response from the market whether provisions drafted in the country were adequate to provide the right platform," said Rafe Haneef, CEO of HSBC Amanah Malaysia. He also said that while the Malaysian market caters to investors seeking Shariah compliant solutions, jurisdictions such as Hong Kong and Singapore cater to investors seeking alternative sources of financing.

Furthermore, Malaysia must increase the issuance of US dollar-denominated Sukuk to achieve its aspiration of becoming a financial hub.
"The advantage of US dollar Sukuk issuances in Malaysia will be that the credit of companies will be regularly monitored by investors abroad and this will enable support from international investors,” said Rafe.

Playing by the rules (By IFN)

See: http://redmoney.newsweaver.co.uk/1rh8f7nsquzh38rwoni3wx?email=true&a=6&p=22951925&t=21001835

In a world bound by rules, regulators and the authorities play a key role in ensuring that we toe the line. While the importance of those authoritative bodies cannot be denied, their presence also puts forth the question: Who regulates the regulators?

Quite often, it is the theoretical fourth estate which helps keep the higher-ups in check; and this week, we at Islamic Finance news play our part with a closer look at our industry’s standard setting bodies; as covered in our lead story.

However, there is no escaping regulations and regulators, which are crucial to growth and development; and our issue this week also gives a nod to the support that the law and the authorities provide to our fledgling industry. Dr Wan Nursofiza Wan Azmi of the Asian Institute of Finance provides an excerpt of a chapter in the Global Islamic Finance Report 2012; covering the Malaysian government’s support in developing Islamic microfinance in the country.

Tanzania’s budding Islamic banking market has also benefited from a sound conventional regulatory framework; as Khalfan Abdallah of Amana Bank Tanzania writes on the development of the industry in the east African country; while we cross to the UK with a feature on Islamic financial products on the London Stock Exchange (LSE) by Gillian Walmsley of the LSE.

We return to Malaysia with an article on the performance of the country’s Sukuk market by Meor Amri Meor Ayob of Bond Pricing Agency Malaysia; and our Takaful feature on the country’s various models of Shariah compliant insurance by Mohammad Mahbubi Ali of ISRA.

Insider takes a look at developments at Kuwait Finance House; IFN Reports cover the development of Islamic finance in Hong Kong and provide a snapshot of first quarter 2012 financial results of banks and corporates in Malaysia and the Middle East; and IFN Correspondents contribute reports on the establishment of charitable foundations in Saudi, new Takaful rules in Pakistan and the structuring of Sukuk Wakalah.

Meet the Head talks to Dr Shahinaz Hanem Rashad Abdellatif of Egypt’s Metropolitan Consultancy; and our Case Study highlights Tanjung Bin Energy Issuer’s US$1.07 billion Sukuk.

Participation banks shy away from Treasury’s revenue-linked bonds (By IFN)

See: http://redmoney.newsweaver.co.uk/fyd8k1e46veh38rwoni3wx?email=true&a=6&p=22857505&t=20986755

TURKEY: The country’s Islamic, or participation, banks have reportedly shied away from the Treasury’s auction of revenue index bonds on concerns that the papers are not Shariah compliant.
The banks’ decision is said to have been fuelled by comments from local Shariah scholar, Professor Hayrettin Karaman, who noted that the structure of revenue-linked bonds does not comply to Shariah as the revenue is based on interest.

Turkey’s Treasury last issued revenue index bonds on the 19th February this year, with a total issuance amount of TRY109.2 million (US$61.3 million). Coupon payments for the instruments are linked to revenue from state-owned enterprises, the Turkish Petroleum Corporation, the State Supply Office, the State Airport Authority; and the Coastal Safety Administration.

As a result of the doubt cast over the revenue-linked bonds, the country’s participation banks, comprising Kuveyt Türk, Albaraka Turk, Türkiye Finans and Bank Asya now reportedly await to invest in Sukuk instead. Turkey, which issued legislative changes in 2011 to allow for tax neutrality measures for Sukuk Ijarah, has yet to issue a sovereign Islamic bond. Kuveyt Türk was the first Turkish issuer to offer a Sukuk in 2010; and was also the first to sell papers under the new Sukuk Ijarah law last year.

Osman Akyüz, the secretary general of the Participation Banks Association of Turkey, is also quoted as saying that the banks are looking to invest in Sukuk by this August. According to the data from the association, as of March this year, three of the country’s participation banks invested in TRY984 million (US$553 million)-worth of revenue index bonds.

Asia’s sovereigns continue to lead Sukuk sales (By IFN)

See: http://redmoney.newsweaver.co.uk/12flcbnbw9dh38rwoni3wx?email=true&a=6&p=22373755&t=20885655

GLOBAL: Asia’s sovereigns have issued a slew of Sukuk in March; in a sure sign that government and government-related debt will continue to dominate the market this year.

Among sovereign and quasi-sovereign Sukuk that have been issued this year include a BN$100 million (US$79.29 million) short-term Sukuk Ijarah issuance from the Autoriti Monetari Brunei Darussalam, the monetary authority, on the 8th March. While remaining under the radar, this is the Brunei’s government 69th issuance of short-term Sukuk; amounting to BN$3.75 billion (US$2.97 billion)-worth of short-term Sukuk since April 2006.

Meanwhile, Indonesia’s government raised IDR1.66 trillion (US$180.94 million) in a Sukuk auction on the 13th March, while its retail Sukuk auction is set to close today; and Malaysia’s Khazanah Nasional issued a US$358 million exchangeable Sukuk.

The activity in the sovereign Sukuk market is also in tandem with the preference seen for emerging market assets that has arisen as a result of the prevailing Eurozone crisis.

In a report on 2011 sovereign transitions and defaults, Fitch Ratings noted that: “Economic and financial disruptions emanating from the Eurozone crisis and Middle East political unrest rendered negative effects on a number of sovereign ratings in 2011. By contrast, Asia Pacific, Latin America and a handful of emerging European credits provided most of the positive sovereign rating moves; with improved growth and economic metrics a common theme.”

It also said that the accumulation of international reserves, greater monetary and exchange rate flexibility, moderate fiscal deficits, strong growth and greater resilience to shocks underpinned the broadly positive credit and ratings outlook for emerging markets last year. “With the exception of the Middle East and Africa, where the political and economic fallout from the Arab Spring took their toll on sovereign creditworthiness, emerging markets quality advanced strongly in 2011,” it added.

Fitch also commented that ratings upgrades for emerging Asia’s sovereigns also picked up momentum last year; with Indonesia as among countries which saw its credit rating move to investment grade from speculative.

Khazanah Nasional closes another Islamic deal in Hong Kong (By IFN)

See: http://redmoney.newsweaver.co.uk/11xjcoenq12h38rwoni3wx?email=true&a=6&p=22335245&t=20877705

GLOBAL: Malaysian sovereign wealth fund (SWF), Khazanah Nasional, has once again tapped the Islamic market for a China-related deal; issuing a US$358 million Sukuk convertible into shares of Hong Kong-listed Parkson Retail Group.

Khazanah owns around 7.8% of Parkson. Its Sukuk is exchangeable into its entire holdings in Parkson, equivalent to 220 million shares.

Speaking to Islamic Finance news, a banker involved in the transaction commented that: “The deal was smoothly executed and successfully priced at the tightest end of the guidance. It received overwhelming response from the investors; marking yet another successful foray by Khazanah into the exchangeable Sukuk market.”

Pricing for the papers, which mature in seven years, was fixed at 0% at its launch. However, the yield was offered in a range between -0.25%-0%; with a conversion premium of 25-30%.

The deal was arranged by CIMB, Deutsche Bank and JP Morgan; and saw over US$1.5 billion-worth of demand from over 100 investors. The investors reportedly include convertible bond hedge funds; while also comprising investors from Asia, who took up around half of the offering, Europe (30%) and the Middle East (20%).

The Sukuk is backed by Khazanah’s holdings in Parkson and follows a similar transaction in 2008, when the SWF raised US$550 million through a five-year Sukuk convertible into 44 million Parkson shares, equivalent to a 7.9% stake.

The equity backing the current Sukuk deal is also underlying the 2008 Sukuk; of which 55% remains outstanding.

Sukuk in the pipeline (By IFN)

See: http://redmoney.newsweaver.co.uk/6vcocsmwafah38rwoni3wx?email=true&a=6&p=21893445&t=20781975

TUNISIA: The Tunisian government is looking to issue the country’s first sovereign Sukuk this year to finance the budget deficit incurred during last year’s uprising. Adnan Ahmed Yousif, the CEO of Al Baraka Banking Group, revealed that the government is currently in talks with banks with regards to a potential issuance. “They are very serious about it,” he added. Al Baraka Bank is also currently consulting the Tunisian government on Islamic finance, although it was not revealed if the bank is also providing consultation on the Sukuk.

It was revealed just yesterday that the Tunisian government is looking to become an Islamic finance hub in Africa, and is set to establish a legal framework to regulate the country’s Islamic finance industry. Hamadi Jebali, the interim prime minister revealed that the country would need US$35 billion to US$45 billion to finance its development projects, and is looking to the IDB for support. Ahmed Mohamed Ali, the president of the IDB, also acknowledged the potential for infrastructure and development projects in the country, and to see the Tunisian private sector play a more significant role in the implementation of the bank's projects in Tunisia and Africa. He also added: “The French Development Agency had recently suggested to the IDB drawing up a microfinance program in Tunisia.”

Libya and Egypt are also ramping up their Islamic finance efforts to fund budget deficits incurred during the uprisings and to finance re-building and infrastructure projects. Libya has also recently revealed its aspirations to create an Islamic finance framework to regulate the country’s fledgling industry.

US$2 billion sovereign Sukuk for Egypt? (by IFN)

EGYPT: The government is reportedly preparing to raise around US$2 billion through its first sovereign Sukuk issuance as it seeks to build up declining public funds.
According to Islamic scholar Sheikh Hussein Hamid Hassan, the Egyptian government is convinced that a foreign currency Sukuk will fund the country’s development projects and plug a leak in its foreign reserves, which fell US$1.77 billion to US$16.35 billion in January. The reserves are down by more than 50% since its political revolution a year ago.

“The Sukuk will be in US dollars or Euros; or maybe a combination. It will be around US$2 billion, issued in several tranches targeting mainly Egyptians living outside Egypt,” said Sheikh Hussein.

S&P downgraded Egypt’s ratings to ‘B’ from ‘B+’ on the 10th February as a result of its sharp decline in foreign exchange reserves and its ongoing political uncertainty. “There would be a further downgrade if the Egyptian government failed to stem the decline in reserves, or an uncertain policy environment and weak institutions emerge from the ongoing political transition,” said the ratings agency.
The country’s anxiety over funding has led it to seek US$1 billion from the World Bank and the African Development Bank. According to Momtaz al-Saeed, its finance minister, the country needs US$11 billion to finance economic reform.

Its potential sovereign Sukuk could make up some of the US$2.5 billion-worth of US dollar-denominated bonds said to be for sale by the end of this month.

With the country’s dire need of funds and the Islamist Freedom and Justice Party and the Nour Party set to make up its national coalition government, could Islamic funding emerge as the answer for Egypt’s shrinking coffers?

Article by IFN: 2012 - Fireworks or dynamite?

(SEE IFN): The Islamic finance industry has gotten off to an explosive start this year; with two landmark Sukuk issuances in the second week of January alone. These comprise Projek Lebuhraya Usahasama’s US$9.67 billion Sukuk, the world’s largest offering by a single issuer to date and the launch of a Sukuk from Saudi Arabia’s General Authority for Civil Aviation, marking the first ever sovereign Islamic bond from the kingdom.

The watershed sales were preceded by two benchmark-sized sales from First Gulf Bank and Emirates Islamic Bank, in addition to a US$300 million offering from Tamweel – making up a flurry of issuances that have led market players to predict 2012 as heralding an unprecedented year for Sukuk, even before the first month of the year has drawn to a close.

PLUS sells landmark US$9.67 billion Sukuk; world’s largest Islamic bond offering to-date (By IFN)

SEE IFN> MALAYSIA: Projeck Lebuhraya Usahasama (PLUS) issued a landmark RM30.6 billion (US$9.67 billion) Sukuk on the 12thJanuary, in what is widely seen as the world’s largest Islamic bond offering to-date.

The deal, managed by CIMB Investment Bank, AmInvestment Bank, Maybank and RHB Investment Bank, was made up of a RM19.6 billion (US$6.3 billion) ‘AAA’-rated program and an RM11 billion (US$3.5 billion) government guaranteed program.

Speaking to Islamic Finance news, Badlisyah Abdul Ghani, the executive director and CEO of CIMB Islamic, said that the ‘AAA’-rated program was priced at between 3.9-5.75% for 21 tranches with maturities ranging from five to 25 years. The government guaranteed program was priced at 5.5% for two tranches maturing in 26 and 27 years.

He also said that the program was privately placed; taken up by the transaction’s lead managers and pension funds.

The success of the issuance has also led to optimism on Malaysian Sukuk sales this year, with Badlisyah noting that: “This will be the best year ever.”

He said that although the PLUS deal makes up the largest Sukuk sale from a single issuer to-date, another transaction is expected to follow this year due to the number of projects coming on-stream in Malaysia from the government’s economic transformation program.

The CIMB Group is also expected to continue dominating the market this year for arranging Sukuk, Badlisyah added.

Goldman Sachs US$2 billion Sukuk facing heat (by IFN)

SEE IFN: Goldman Sachs’ US$2 billion debut Sukuk program continues to attract controversy as news emerged that three Shariah scholars named in its prospectus as potential endorsers of the papers have not responded to requests to participate in the compliance approval process.

The program’s Shariah compliance has been mired in doubt following questions first raised in a report in Islamic Finance news, (Vol 8, Issue 47), on the 30thNovember last year.

In the latest development, Asim Khan, the managing director of Dar Al Istithmar, which is the Shariah advisor on the deal, said that the scholars comprise Dr Daud Bakar, the president and CEO of Amanie Business Solutions, Shaikh Abdulla Sulaiman Al Manea, the deputy chairman of the Shariah board at AAOIFI and Dr Mohamed Ali Elgari, a professor of Islamic economics.

However, Asim said that their lack of cooperation has no bearing on the Sukuk’s Shariah compliance. “Given that the issuance was not to take place at that stage and this was only a preliminary prospectus, it was appropriate not to pre-judge the eventual outcome or speculate which Shariah scholars would eventually be able to consider, evaluate and sign off on the Shariah compliance of this complex transaction,” Asim was quoted as saying.

According to the Sukuk’s prospectus: “A group of Shariah scholars composed of, among others, members of the Shariah supervisory board of the Shariah advisor may, at the request of the Shariah advisor, issue a fatwa as to their view on the Shariah compliance of the program on or about the closing date. The advising scholars are expected to be: Dr Hussain Hamed Hassan; Dr Ali Al Qaradaghi; Dr Abdul Sattar Abu Ghuddah, Dr Abdulaziz Fawzan Saleh Al Fawzan; Dr Daud Bakar; Dr Aznan Hasan; Sheikh Abdullah Sulaiman Al Manea; and Dr Mohamed Ali Elgari.”

Meanwhile, two scholars, who have declined to be identified, have reportedly expressed surprise and concern over the listing of their names in the prospectus.
However, Goldman has continued to stand by the compliance of the program, commenting to Islamic Finance news that: “We are entirely confident in the opinion we received that our program is in compliance with Shariah laws.”

PLUS Berhad Issues World's Largest Sukuk At RM30.6 Billion

KUALA LUMPUR, January 8: Projek Lebuhraya Usahasama Berhad (PLUS Berhad) is set to issue RM30.6 billion Sukuk – the largest global Sukuk and Malaysia’s single largest bond issuance to-date.

The Sukuk issuance, scheduled for January 12, follows the privatisation of PLUS Expressways Berhad (PEB) – one of Malaysia’s largest privatisation exercises – and the restructuring of the toll concessions under PEB and Penang Bridge Sdn Bhd (PBSB). The concession agreements of these highways will be novated to PLUS Berhad, a wholly owned subsidiary of PLUS Malaysia Sdn Bhd. The latter is the investment vehicle of UEM Group Berhad (51 percent) and Employees Provident Fund Board (EPF; 49 percent).

See: http://www.kwsp.gov.my/index.php?ch=p2news&pg=en_p2news_press&ac=3770

Sukuk market set to heat up in 2012 with potential sovereign issue

SAUDI ARABIA: The country's Sukuk market is set to heat up next year with a potential issuance of a sovereign riyal-denominated Islamic bond.

According to reports, the kingdom's central bank, the Saudi Arabian Monetary Agency (SAMA), is in talks with several local and international banks on the details of a sale which could come to market as early as the first quarter of 2012.

The news emerged just a day after its General Authority of Civil Aviation announced that it will issue a Sukuk by February next year to finance the construction of its new airport in Jedah; a project that will cost US$7.2 billion.

QUOTED FROM ISLAMIC FINANCE NEWS

Emirates NBD shelves plans for Sukuk sale

UAE: Emirates NBD (ENBD) has reportedly shelved plans to issue a five-year Sukuk, which had originally been expected to come to market as early as the third week of December. The bank had been in talks with several banks to manage the transaction, although it had yet to mandate any. It has since emerged that the bank will not proceed with any plans for the issuance, with its subsidiary, Emirates Islamic Bank (EIB), now said to be looking at issuing the Islamic bonds.

EIB is reportedly eyeing a roadshow for a Sukuk next year depending on market conditions, with a sale hinging on investor appetite. Rick Pudner, the CEO of ENBD, earlier said that the bank was considering issuing a five-year US dollar-denominated Sukuk, with the final decision on its funding options to be made within the first two weeks of December.

Although the emergence of its decision is consistent with this timeframe, it also coincides with weak investor sentiment for the bank's shares, which are listed on the Dubai Financial Market, following a report from Goldman Sachs that the bank may need to book up to AED8 billion (US$2.1 billion)-worth of provisions for bad debt by the end of 2013. The report calculated a provisioning of between AED6 billion (US$1.6 billion) and AED8 billion between the fourth quarter of this year and the fourth quarter of 2013.

The bank, already one of the largest creditors to Dubai World, took over the troubled Dubai Bank in October this year, shortly after the Islamic bank was bailed out by the Dubai government.

Plagued with poor asset quality and weak investor sentiment, ENBD's decision to call off its Sukuk issuance may just have circumvented possible poor demand for its papers.

See IFN: http://eblast.redmoneygroup.com/link.php?M=3397194&N=3077&L=7380&F=H

Bond Market Performance 24 May 2010 - 24 May 2011

The one year performance (24 May 2010 - 24 May 2011) of the Conventional bonds versus the Islamic sukuk in the Malaysian bond market using the BPA Malaysia FiiX Bond Index Series.

Double click on the image to enlarge.

Based on the graph, the sukuk market outperforms the conventional bond market.

See: www.bpam.com.my

Facilitated in the Islamic Funds & Sukuk School organised by CERT

I was invited to conduct a session at the recent IFSS event organised by CERT. I talked about the importance of Sukuk valuation. Below is the brochure.

IFASS - March 2011

I will upload my slides later.

The Flow of a Bond Issuance - Part 1 - Pre-issuance stage

Now that we know about the key infrastructure in the Malaysian bond market, let us go straight to the process of issuance. As highlighted in the previous posting, there are three stages to a bond issuance. Today, we will cover the first part, the pre-issuance stage.

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•This is the most taxing process. The success of any bond or sukuk issue depends on the ability of the issuer (through counselling by the various advisers) to structure a deal that fulfils investors’ risk appetite at that particular point. It is therefore critical that the issuer has an intimate understanding of the risk appetite of their targeted investors. Misreading the market could cost the issuer dearly in terms of expenses as well as under-subscription of the bond or sukuk issue. The latter may, however, be mitigated by having underwriters.

• The key success factor in this process is the ability of the various parties to play their parts in maximising the issuer’s utility. To ensure that this goal can be easily achieved, a good project-management team is an important ingredient. The project-management team, typically the financial adviser, must be savvy vis-à-vis the necessary steps that can minimise time to market and also the issuer’s overall costs.

• The entire structure will then go through final certification by the relevant regulators. The SC is the main regulator when it comes to bond and sukuk issuance. Approval from the other regulators, such as BNM and Suruhanjaya Syarikat Malaysia (or SSM), is also needed - depending on the issuer as well as the type of instrument being offered for sale.

•Bond and sukuk markets can only function efficiently if there is transparency. The information presented to regulators and potential investors must be as comprehensive as possible. Should there be queries, the regulators have the right to request for clarification; this process could unnecessarily delay the entire issuance process. Moreover, it also entails some form of financial “penalty” in the form of administrative fees each time the SC sends out queries and reviews the answers from the prospective issuers.

 

 (Double click on image to enlarge)