Malaysia’s Khazanah Nasional is a rare issuer in the international capital markets, but it showed its credentials this year with a rare exchangeable bond that came an enviable terms, even beating the cost of a similar issue from Singapore’s Temasek Holdings.
Source: Reuters/Bazuki Muhammad
Malaysian fans hold placards during their 2014 FIFA World Cup qualification soccer match against Singapore in Kuala Lumpur.
When Singapore state investment company Temasek Holdings printed a zero-coupon $500m (US$409m) exchangeable in November 2011 during a patchy year for convertible bonds, it looked as if pricing could not get any tighter.
Indeed, while some large deals have succeeded at tight pricing, periods of stability have rarely lasted beyond a few days, and there have been whole months when no equity-linked deal has printed.
On top of that, gains for regional stock markets in the first quarter of this year had left some issuers with unrealistic price targets, even after the market subsequently corrected.
Investors had signalled they were still open to new issues from established issuers and blue-chip names, but only at the right prices.
That perception was shattered when Malaysian state investment agency Khazanah Nasional came to market in March this year, printing a US$357.8m exchangeable sukuk at a yield of minus 0.25%.
It was the only equity-linked offering to price with a negative yield in Asia ex-Japan this year, and the first since Taiwan’s UMC in 2009. It was also the first equity-linked transaction from Malaysia since early 2010.
Khazanah’s opportunistic timing allowed it to price inside Temasek’s recent issue, even though its rating of A3, based on the Malaysian Government’s rating, was significantly below that of its Triple A rated Singaporean counterpart.
With the deal, Khazanah also showed that issuers of Sharia-compliant structures do not always need to pay a premium to conventional bond issues. Its strong credit meant it was able to push the maturity out to seven years, with an investor put at the end of year three. This is longer than the usual five-year tenor popular with investors in Asian CBs.
“We are very pleased that this has been executed at a very competitive price, setting a benchmark for sukuk issuances, while the order book in excess of three times the issue size underlines the market’s strong confidence in Khazanah’s credit,” said Khazanah managing director Azman Mokhtar.
The sukuk was issued through Pulai Capital at par, and redeems at 99.25 on the put date and 98.26 on maturity. It priced with a conversion premium of 30% to the March 14 close, the issuer-friendly end of the 25%–30% guidance.
The sukuk is exchangeable into shares of Hong Kong-listed Parkson Retail Group, the Chinese arm of Lion Group’s retail business and a highly liquid name. Parkson operates 52 stories in 34 major cities in China.
The note carried a bond floor of 92.8, based on a 150bp over Libor credit spread assumption, a 0.5% stock borrow and an implied volatility of 27%.
The deal was 3.4x covered, attracting orders from a diverse group of more than 100 investors. Participating investors included long-only, hedge and arbitrage funds, as well as asset managers from across Asia and Europe.
CIMB, Deutsche Bank and JP Morgan led the Khazanah transaction.
Track record
Khazanah is no stranger to equity-linked deals, having issued both Sharia-compliant and conventional exchangeable bonds – including the world’s first exchangeable sukuk in September 2006.
That groundbreaking deal, exchangeable into shares of Telekom Malaysia, raised US$750m on a boost from more than half from its launch size of US$450m after drawing more than US$6bn of orders.
The deal was more than a year in the making, but showed that Islamic funds were ready for an equity-linked product, and that conventional CB buyers would scramble for it, too.
Khazanah has since revisited the model. In returned to the equity-linked market in 2007bto raise US$850m from a sukuk that was exchangeable for shares of toll-road operator Plus Expressways, again enlarged from a base deal size of US$600m.
In March 2008, it issued, via Paka Capital, a US$550m five-put-three exchangeable against Parkson shares with a concurrent equity placement, which was enlarged to US$97m on strong demand.
Khazanah had lent shares to bookrunners Deutsche Bank, CIMB and UBS to enable buyers of the sukuk to go short and hedge their positions, but the new issue needed no such help.
That was Khazanah’s first exchangeable bond offering to use an underlying stock listed on a foreign bourse. Around half of the issue was allocated to Middle Eastern and Islamic investors.
At the time, Mokhtar had said: “The transaction is a wonderful testament of Malaysia’s and Khazanah’s credit and economic fundamentals at a turbulent time in the markets when many countries and companies are afraid of tapping the international market. Deals are being pulled out there and we have entered instead, and the strong terms and 10x oversubscription could not be a stronger endorsement.”
Khazanah has continued to break new ground, with the first Dim Sum sukuk last year, and has shown itself to be a savvy active investor, conducting regular selldowns in its listed portfolio companies.
Since the Parkson EB issue, Khazanah has also managed to issue zero-coupon sukuk denominated in the Malaysian ringgit.
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