As the $3.5 billion Islamic Trust Certificates Program of the Islamic Development Bank (IDB) nears completion, the multilateral development bank (MDB) of the Muslim world, is faced with the dilemma of introducing a new program or increasing the ceiling of the existing one or deciding on other ways to raise funds for its future resource mobilization purposes.
The IDB has thus far issued a $400 million debut sukuk; followed by a $500 million sukuk and an $850 million sukuk in 2009; an $500 million sukuk in 2010 and the recent $750 million in May 2011, thus bringing the total volume of IDB sukuk offerings to date to $3 billion - the largest volume of sukuk issuances by any supranational. The IDB's ceiling of its current Trust Certificate Issuance Program is $3.5 billion. This leaves $500 million of issuances to come.
According to market sources, this remaining tranche could be raised either through another sukuk issuance or through a private placement. However, the IDB's funding requirements for 2011 is estimated at $1.4 billion, and with the current $750 million sukuk, this leaves another US$650 million to be raised.
The crucial meeting will take place during the upcoming IDB Board of Governors Annual Meeting which is scheduled to be held at the end of this month in Jeddah. Some of the senior members of the MDB such as Saudi Arabia, by far the largest equity subscriber of the IDB, argue that the bank is sufficiently capitalized and that armed with its zero risk weighting for an MDB by the Basel Committee and its AAA rating by all three top international agencies -- Moody's, Standard & Poor's and Fitch - it should raise funds from the capital markets.
At the same time, the Board of Governors meeting this year is expected to sound out member countries regarding callable capital. The suggestion is that there should be 50 percent cash callable in 2012-2013 if any motion to that effect is supported and carried at next year's Board of Governors meeting. The only problem is with the transmission of funds from a minority of member countries that are subject to sanctions such as Iran, Sudan and Libya. The IDB's current authorized capital is 30 billion Islamic Dinars (ID), (one ID is equivalent to one Special Drawing Right (SDR) of the International Monetary Fund (IMF). Its subscribed capital is ID15 billion.
No doubt Abdul Aziz Al-Hinai, vice president, finance, IDB was delighted with the outcome of the deal, "which achieved our main objectives for the transaction to build on the success of last year's deal to establish another liquid benchmark and further position IDB in line with its Supranational peer group. I am particularly happy to see a number of new accounts come into an IDB trade for the first time, and would like to thank the lead managers for delivering a deal that met all our objectives."
But, market players suggest that the AAA-rated IDB could do much better in terms of its resource mobilization strategy especially in the professionalism and articulacy of its presentation to investors which primarily include central banks, sovereign wealth funds (SWFs), pension funds and financial institutions.
For instance, they cannot understand why the IDB pre-announced that it was raising $1 billion though a sukuk issuance under its $3.5 billion Trust Certificates Program, when in reality it was forced to downsize the issuance to $750 million. According to one market source who attended one of the road shows, the total applications for the issuance was very disappointing and hardly reached $900 million. The presentation too, he added, was a big disappointment and not befitting a major MDB such as the Islamic Development Bank, which in terms of capitalization, for instance, is way above its peers including the World Bank.
In fact, this issue of pre-announcing a $1 billion issuance backfired in the previous offering in 2010 when the IDB had to downsize to $500 million. This simply adds to the market perception that somewhere along the line the IDB Sukuk issuance strategy is ill-thought out, rushed and bordering on the amateurish.
The latest issuance like the previous one was restricted by its pricing of MS (mid swap) plus 35 basis points (bps), which compared to peer institutions, remains fairly expensive. For instance, the Asian Development Bank (ADB) has just closed a 3-year $1.5 billion bond with a pricing of LIBOR (London Interbank Offered Rate) minus 7, which translated into a 5-year offering such as the IDB one would most likely be priced at LIBOR minus 2.
The profit rate of the IDB sukuk is 2.35 percent paid semi-annually with a maturity date of May 25, 2016. The ADB bonds have a coupon rate of 0.875 percent per annum, payable semi-annually and a maturity date of June 10, 2014, and were priced at 99.767 percent to yield 23 basis points over the 1 percent US Treasury notes due May 2014.
The IDB however did learn one lesson from its 2010 issuance. This time it appointed HSBC, Deutsche Bank, BNP Paribas and Standard Chartered Bank as lead arrangers, which meant that the distribution was more evenly spread between the Middle East, Asia and Europe. For the $500 million sukuk last year there was hardly any subscription from European institutions because there were no banks appointed as lead managers with a distribution reach in Europe. As such both Deutsche Bank and BNP Paribas were omitted in the 2010 issuance.
This time round CIMB Investment Bank was not appointed as a co-lead arranger, perhaps to the chagrin of the Malaysians. It is usually a policy of the IDB to involve institutions from its member countries as far as possible. CIMB is probably the only investment bank with the proven track record in the Islamic fixed income and debt market to compete with the likes of the global banking majors. Its distribution reach however is largely confined to Malaysian institutions and to a limited extent to the GCC and ASEAN region.
The issue, however, saw strong participation from the Asia and the MENA region with good interest from European and US offshore investors. In terms of allocation, the distribution was diversified with 53 percent allocated to MENA, 26 percent to Asia, 16 percent to Europe and 5 percent to the Americas, respectively. In the previous sukuk, Europe's allocation was less than 5 percent.
There are also some questions related to the IDB's road show strategy. This time round it comprised 17 days taking in 11 cities including for the first time Frankfurt and Paris. The IDB might stress that the first leg was more to do with investors meetings as opposed to road shows, but market sentiments are that this strategy is much to long. It may suggest the fragility of the IDB brand as an issuer of commercial paper in the international markets. The obvious comparison is with peer institutions which do not have such extended road shows.
The implication here is that the IDB has still some way to go to building itself as an issuer with an internationally recognized brand which would mitigate the reliance on any major road show, because orders can be settled with a mere phone call because investors would be so comfortable and familiar with the risk of the institution.
The IDB has too other challenges in its sukuk program. Market players suggest that the papers are not very liquid due to the lack of secondary trading and perhaps the pricing. Even on the London Stock Exchange it can take sometimes take two weeks for an investor to offload the trust certificates, which is of no use to any institution in urgent need of raising liquidity.
The IDB is also having difficulties locating new assets. It has about $1 billion worth of assets remaining which is not enough for a future Trust Certificates Program. This despite the fact that the asset pool for the existing $3.5 billion Program comprises a mix of 50 percent assets and 50 percent receivables such as Ijara (leasing) and Istisna (forward sale construction and equipment finance) receipts.
Another distribution challenge is for the issuances to reach the direct US dollar market, which is by far the largest market in the world. However, this will raise new questions because US investors, in compliance with their government's regulations, will need to know where and how the proceeds of the Trust Certificates will be utilized. For instance, if the money is used for development projects say in Syria, Iran or even Sudan, then that would raise serious issues for US investors in IDB papers, because of the US sanctions and restrictions on relations with these countries. One market player however stresses that the IDB should not shy away from such challenges. The aim should be to articulate and promote the IDB as an issuer par excellence and on par with other major international issuers.
According to the IDB, overall the deal saw strong participation from real money accounts and official institutions "providing credence to IDB's credit strength". In addition, the deal also saw first time participation from other Supranational institutions, which were not identified. Some 48 percent was allocated to central banks/official institutions including the Saudi Arabian Monetary Agency (SAMA), Bank Negara Malaysia and the Central Bank of Kuwait; followed by a 33 percent allocation to banks; 15 percent to fund managers and 4 percent to retail investors.
The Trust Certificates are listed on the London Stock Exchange and Bursa Malaysia.
© Arab News 2011
