Oct 17 2011

Global market volatility stalls TAQA sukuk offering

By By MUSHTAK PARKER Following its announcement earlier this month that the Abu Dhabi National Energy Company ( TAQA ) "is setting up a RM3.5 billion sukuk program to diversify funding sources" the issuance process is likely to take much longer given the prevailing volatile market conditions as a result of the fallout of the euro zone sovereign debt crisis and the downgrading of the US credit rating by Moody's Investors Service.

Mohammed Mubaideen, investor relations manager, TAQA , confirmed that the (issuance) process is in early stages and the above announcement was made "to meet regulatory requirements. Any issuance will be subject to market conditions. Markets are very volatile at the moment, and it is very difficult to have a clear vision." He could not give more details on the sukuk program nor the size or structure of the first tranche.

Last month, Khazanah Nasional Berhad, the Malaysian sovereign wealth fund, postponed the issuance of its debut dim sum sukuk in the offshore renminbi market in Hong Kong for the same reasons on the advice of the mandated lead arrangers Bank of China International, CIMB and Royal Bank of Scotland.

Sovereign Indonesia similarly is awaiting "the right timing" to launch its proposed $1 billion plus benchmark global Islamic trust certificates (sukuk) to which Standard & Poor's Ratings Services last week assigned a "BB+" long-term foreign currency issue rating and Moody's Investors Service a provisional rating of Ba1.

According to Bhimantara Widyajala, director, Indonesian Ministry of Finance's Debt Management Office, the issuance will go ahead but only at the right timing and pricing. The ministry has already mandated HSBC, Citigroup and Standard Chartered Bank to arrange the Sukuk Al-Ijara (leasing sukuk) offering, which will be issued by Perusahaan Penerbit SBSN Indonesia II (PPSI-II), a special purpose vehicle (SPV) on behalf of the Indonesian Ministry of Finance.

Last week also Kuveyt Turk Participation Bank (KTPB) , which is majority owned by Kuwait Finance House, one of the largest Islamic banks in the world, launched its road show for its proposed 5-year $350 million Sukuk Al-Ijara issuance in Kuala Lumpur in Malaysia albeit taking in also other centers in Asia, the GCC and Europe, and once again signifying that issuers from the Middle East, largely from the Gulf Cooperation Council (GCC) countries and Turkey, are increasingly turning to investors in Malaysia and Asia to raise their funding requirements. This according to some bankers is due to the fallout of the so-called Arab Spring and both issuers investors are more cautious of investing in papers originated in some parts of the region.

TAQA 's investor relations manager, Mohammed Mubaideen, concurs that "the company would like to diversify its sources of funding. The Malaysian market has great potential and is one of the markets that we are looking at."

The good news is that TAQA is looking at Islamic finance as part of its diversification of sources of funding strategy, and according to Mubaideen, TAQA already utilizes Islamic financing at its project level.

The proceeds of the proposed sukuk issuance "will be used for general corporate purposes" and currently TAQA has no plans for further forays into the Islamic finance market to fund expansion or acquisitions in new markets? Currently TAQA does not have any expansion plans in new markets, said Mubaideen.

He agrees that "the role of Islamic finance will become more important in the region" over the next few years especially to serve the oil and gas industry in the GCC/MENA countries.

International credit rating agency, Moody's Investors Service, has already assigned a provisional A3 rating to TAQA 's proposed RM3.5 billion sukuk program. In its rating rationale, Moody's stressed that the Sukuk Murabahah instruments to be issued pursuant to the program will rank pari passu with all other unsecured and unsubordinated obligations of TAQA and therefore carry the same rating as TAQA 's A3 long term issuer rating. "The purpose of establishing the sukuk program by TAQA is to diversify its investor base, with management's intention of using proceeds for general corporate purposes. Moody's understands that the interest and principal Malaysian Ringgit currency exposure will be fully hedged. The terms and conditions of the sukuk program are based on Malaysian law," said Moody's.

These above developments follow the offering in August 2011 of the RM750 million ($254 million) Sukuk Wakala bi Istithmar issued by Kuwait-based Gulf Investment Corporation (GIC) under its existing 20-year RM3.5 billion ($1.18 billion) medium term notes program. GIC, whose shareholders include the governments of the GCC states, namely, Kuwait, Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman, and whose mandate is to promote private enterprise and support economic growth in the GCC region, raised the RM750 million in the Malaysian market through a 5-year sukuk issuance which has a profit payment of 4.9 percent to be paid twice a year.

Other foreign issuers that have originated sukuk in Malaysia include the World Bank and its private sector funding arm, the International Finance Corporation (IFC); the $100 million Sukuk Al-Ijara issued by Japan's Nomura Holdings; the RM100 million Sukuk Al-Ijarah issued by Islamic Development Bank; and the RM500 million 10-year sukuk issued by the National Bank of Abu Dhabi.

However, the biggest breakthrough potentially came in 2010 when Saudi Arabia's Al-Rajhi Bank, the largest Islamic bank in the world in terms of balance sheet, collaborated with Cagamas Berhad, the National Mortgage Corporation of Malaysia and leading securitization house, to develop and launch the Sukuk Al-Amanah Li al-Istithmar (Sukuk ALIm), which was the underlying structure for Cagamas's RM5 billion Islamic Commercial Paper (ICP) and Islamic Medium Term Note (IMTN) program. This "first-of-its-kind" and "innovative" structure was sold to investors in Saudi Arabia and is a manifestation of Al-Rajhi's new-found strategy of bridging the gap and facilitating cross-border activity in the Islamic capital market between Malaysia and the Middle East.

© Arab News 2011

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