By Nethelie Wong
HONG KONG, Sept 17 (IFR) - Malaysia's Khazanah Nasional is
set to make history through a small, but path-setting sukuk in
the offshore renminbi market. Last week, the government
investment arm mandated BOC International, CIMB Bank and RBS to
lead the first-ever Islamic financing in Hong Kong's booming Dim
Sum market. (source)
Khazanah's move highlights the resilience of the Dim Sum
bond market amid a worsening European debt crisis. It will also
come as a huge fillip to Hong Kong's standing as Asia's
financial hub, introducing a liquid Middle Eastern investor
base.
"As a Malaysian Government entity, a renminbi sukuk issue of
this size should fly just on scarcity value, as long as it is
priced in line with the government yield curve," said
London-based John Bates, head of fixed-income at Silk Invest, a
specialist fund management boutique.
The only negative is the deal's small size. A target of
Rmb500m (US$77.5m) with a tenor of five years has been rumoured
for Khazanah's debut Dim Sum sukuk, although a three-year piece
is also being talked about.
"The issue size will make this sukuk debut rather an
anticlimax for mainstream international investors," added Bates.
Khazanah's plans are a big boost to Hong Kong's
long-standing ambitions to become an Islamic financing hub - so
far with little success. Three public-sector firms, namely MTR,
Hong Kong Airport Authority and Hong Kong Mortgage Corp had been
considering sukuks, and even the Hong Kong SAR Government was
heard to be working on its first sovereign sukuk before the 2008
crisis.
HONG KONG'S EXPERIMENT
A lack of Sharia-compliant assets and high transaction costs meant the deals ultimately came to nothing, and tax reforms promising to put the structure on a more competitive footing never arrived.
"Hong Kong has done several Islamic financing transactions,
but just not Islamic financing based on local assets. The tax
issues that hold back local issuances are being looked at, but
have not been resolved yet," said Davide Barzilai, partner at
Norton Rose.
Khazanah, however,
does not face the same hurdles. The underlying assets are outside of
Hong Kong, meaning they are not subject to stamp duty, while dividend
payments (the equivalent to coupons) are exempt as the earnings are generated outside of the city.
Khazanah already has an existing multi-currency
Islamic securities programme through Danga Capital, the issuer of the
trust certificates, which will have recourse to Khazanah, the obligor.
To include a renminbi deal, it needs only to add a supplemental trust
deed to the programme document.
As one of the world's major sukuk issuers, many Islamic
investors are already familiar with its programme and the
relevant Sharia status,
"Renminbi seems the prime reason for Islamic investors to
come to Hong Kong. So, a Dim Sum sukuk may help kick-start the
Islamic financing market in Hong Kong," said Jeffrey Kirk, a
partner at Appleby.
However, things will be quite different for inexperienced
sukuk issuers because standalone documentation is costly and
time-consuming with many issues to be resolved relating to
Sharia compliance.
So, bankers
expect future Dim Sum sukuk issuers to be seasoned Islamic borrowers,
mostly likely with existing programmes, such as Indonesia and some Middle East countries.
Khazanah will meet investors in Hong Kong on September 19
and Singapore on September 20. The certificates are expected to
be listed in Malaysia and settled via CMU with the HKMA.
In terms of pricing reference, Aa3 rated China
Ministry of Finance's outstanding paper due August 2016 was quoted at
1.23%-1.36% in the secondary market. Malaysia has a sovereign rating of
A3 from Moody's.
Some bankers, however, think the issuer could have a slight
pricing advantage because of the small size and its first-mover
advantage.
(Additional reporting by Jing Song)
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