Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on December 19-25, 2016.

 

CIMB Investment Bank Bhd achieved many firsts with the US$398.8 million exchangeable sukuk that was issued for Khazanah Nasional Bhd’s special purpose vehicle, Bagan Capital Ltd.

It is the first US dollar-denominated sukuk offering with a non-shariah compliant reference stock at issuance. It is also the first ever sukuk in the world to offer exposure to the growing water utility sector in China. In addition, it is the only equity-linked transaction to achieve more than 40% exchange premium in Asia-Pacific ex-Japan this year.

The sukuk is exchangeable into shares in Beijing Enterprises Water Group Ltd (BEWG), one of the leading integrated water and sewerage treatment solutions service providers in China.

This sukuk has no periodic payment over its five-year tenor.

It effectively allows Khazanah to mone­tise its initial investment in BEWG, at an implied holding period return of between 146% and 249%, depending on whether there is a full exchange of the sukuk at the exchange price.

Khazanah invested HK$1.18 billion (RM486 million) in October 2013, as part of a wider collaboration with Beijing Enterprises Group Co Ltd. A full exchange of the sukuk would value the stake at HK$3.1 billion or an implied holding period return of 249%.

While Khazanah has completed six exchangeable sukuk before this, Bagan Capital achieved the highest conversion premium yet, at 43%. It is the highest zero coupon and zero yield equity-linked issuance in Asia-Pacific ex-Japan since 2007, and the highest achieved by an exchangeable bond/sukuk in the utility and energy sector in Asia-Pacific ex-Japan since 2003.

Overall, the books were strongly covered with over 50 accounts participating. The allocation achieved a well-diversified investor base with Asian investors accounting for 60% of the deal with the balance allocated to European investors. The demand was equally spread between convertible bond outright investors and hedge funds.

Furthermore, the sukuk also traded above par in the secondary market post-issuance.

Overall, the sukuk achieved several objectives. It allowed Khazanah to forward-monetise its investment at a substantial premium to the prevailing market price. The zero periodic distribution rate and zero yield structure also made the exercise cost-efficient from a funding perspective, reducing Khazanah’s funding costs.

Lastly, the innovative structure of the sukuk allowed Khazanah to undertake the transaction in a shariah-compliant manner, which is one of its funding objectives, despite the fact that the underlying company, BEWG, is not shariah-compliant.

 

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