A Malaysian issuer, ironically, made the largest contribution to innovation in Singapore’s Islamic finance market this year, when sovereign fund Khazanah Nasional issued the first exchangeable sukuk denominated in Singapore dollars.
Khazanah, a repeat issuer of exchangeable sukuk after having pioneered the asset class, was looking to raise Singapore dollars to fund some projects with its South-East Asian neighbour.
The fund, having considered four stocks to underlie the offering, settled on a sukuk exchangeable into shares of IHH Healthcare, the largest hospital operator in Asia. IHH Healthcare listed its shares in Singapore and Malaysia in a dual IPO in July 2012.
The zero-coupon five-year put-three offering was lifted to S$600m (US$480m) on strong investor demand, from a base size of S$500m, and closed more than 4x subscribed at the larger amount. That allowed it to price at the aggressive end of terms, with a strike price 17% above IHH Healthcare’s last trade and a negative 0.25% yield.
The pricing stood out in that it was the first equity-linked deal to achieve a negative yield in Asia ex-Japan this year. The exchange premium was also impressive, given that IHH Healthcare’s stock price had run up 24% in the year to date before the deal.
Joint bookrunners CIMB, Deutsche Bank and Standard Chartered distributed the sukuk to more than 100 investors, comprising a mix of multi-strategy funds and outright investors. Allocations were split evenly between Asia and Europe. The bond traded up from par to about 100.875 the following morning, showing the leads had gauged demand accurately.
IHH Healthcare is not the most liquid stock, since Khazanah holds a 45% stake and there are other long-term shareholders. As such, Deutsche Bank arranged a stock borrowing facility for up to 60% of the underlying shares.
Standard Chartered sweetened the deal in providing an asset swap for about S$100m at a spread of 140bp, partially as a reference point for investors.
The success of the deal was all the more impressive because a European Union directive on alternative investment funds, implemented in July, had complicated efforts to market the sukuk to European investors.
Since only the UK and Switzerland had clarified that sukuk structures were not affected, there was a fair amount of ambiguity as to how other markets would apply restrictions on collective investments.
The sukuk bonds are issued through offshore vehicles and have different elements that can be substituted, potentially bringing the structure under the alternative investment rules. As a result, European marketing concentrated almost entirely on the UK.
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