The Government of Malaysia’s sovereign sukuk set a milestone in the Islamic finance market in a complicated economic and political climate.
The US$1.5bn dual-tranche 144A/Reg S issue comprised a US$1bn 10-year tranche and the world’s first 30-year sovereign sukuk.
The tenor is a milestone that will help create a long-dated benchmark Islamic curve for other similar issuers in the future.
The sukuk used wakala principles and was the first sovereign issue to be structured using sharia-compliant commodities, leasable assets, and non-physical income-generating assets, in the form of rights to participate in the provision of services.
That the bonds were issued in a particularly complicated political climate, as well as a challenging economic situation, made the investor response all the more impressive.
At the time, Malaysian Prime Minister Najib Razak and former PM Mahathir Mohamed were trading accusations over troubled state investment vehicle 1MDB, and the government’s ruling coalition was under serious strain. Additionally unhelpful for Malaysia’s finances were stubbornly low prices for its oil exports and a local currency that was losing value.
Nonetheless, the bonds received a combined order book of US$9bn from 450 global investors, enabling the leads to tighten pricing 20bp on the 10-year piece and 15bp on the 30-year. US investors made up an impressive 29% of the 30-year’s book and Middle Eastern investors accounted for an unusually large 24% of the 10-year orders. Typically, Middle Eastern investors are reluctant to invest in tenors beyond seven years, but the scarcity value of Malaysia’s first issue since 2011 lured them.
Both tranches of the sukuk priced inside comparable US dollar bonds from higher-rated state oil giant Petronas. The sovereign also priced flat to where an issuance of conventional bonds would have come, defying expectations that it might need to pay a premium of as much as 15bp–20bp for the sukuk structure.
Investors credited joint bookrunners CIMB, HSBC and Standard Chartered for dispelling 1MDB-related worries during the global roadshows. There were concerns that the government would use proceeds from the bonds to refinance 1MDB’s growing debt burden, but investors were reassured that these would be used to redeem an existing US$1.25bn sukuk due two months later.
The 2025s, priced to yield 115bp over US Treasuries, rallied to 112bp/109bp in secondary, while the 2045s, priced at 170bp, traded tighter to 164bp/161bp shortly after pricing on the back of solid investor demand.
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