Malaysia is already the world’s biggest Islamic bond market. However, co-operation with Middle Eastern investors has been lacking and national mortgage agency Cagamas is leading efforts to change that.
Malaysian mortgage agency Cagamas set a record of sorts this August when it sold three-year Islamic bonds of M$1bn (US$322m). Cagamas has long been a prolific issuer, but this was not the usual sukuk structure it had offered to the market in the past. Instead, the Islamic bonds, named Sukuk al-Amanah Li al-Istithmar, or Sukuk ALIm, were designed to forge a stronger connection with the Middle East market.
Although Malaysia is the world’s biggest Islamic bond market, Middle Eastern investors have often argued that the sukuk papers do not comply with their standards of Sharia compliance. This so-called non-compliance has stopped more Middle Eastern borrowers from tapping the ringgit market, and prevented that region’s investors from putting money into Malaysian debt issues. The lack of involvement from the largest Muslim region had, until recently, crimped Malaysia’s claim of being a truly sukuk centre.
Cagamas has changed all that. It roped in Al Rajhi Bank, from the most conservative Middle Eastern country of Saudi Arabia, to work with Malaysia’s RHB Investment Bank on a new structure that would appeal to more investors from the Gulf region. This came in the form of Sukuk ALIm, incorporating the principles of Al-Ijarah and Al-Wakala.
The Sukuk ALIm is similar to a sukuk Istithmar, but precludes the principles of inah (sale and buyback), bai’ dyan (trading of debt), tawarruq munazzam (pre-arranged transactions between multiple parties) and wa’ad (undertaking). In essence, the structure meets with Middle Eastern compliance and makes the bonds tradable in the Gulf, allowing investors there to buy into the bonds.
Royal Bank of Scotland joined the lead manager team before the launch of the Sukuk ALIm. Al Rajhi Bank and Amanie Business Solutions were the Sharia advisers.
Steven Choy, President & CEO Cagamas Bhd
“That deal made inroads into Sharia harmonisation,” said Steven Choy, Cagamas president and chief executive officer. “For the first time, the sukuk bridged the Malaysian debt market to the ME [Middle East] compliance,” he added. Although the bonds were denominated in ringgit, interest from Middle East-based Islamic institutions was strong. About 43% of the bonds went to offshore participants, of which 33% were Middle Eastern accounts, including some which had never bought sukuk paper from Malaysia before.
In the process, Cagamas increased and enhanced its investor base, a goal it had set for the Sukuk ALIm. An offshore investor base will be expanded over the next few months, as the national mortgage agency is planning a second issuance of Sukuk ALIm. The second issuance, off a M$5bn programme, will be launched before the end of the year.
Investors hoping for a Cagamas debt issue denominated in other currencies will be disappointed as the second issuance will again be denominated in the ringgit. Choy said the company would consider other currencies one day, but pointed out that local markets were still flush with liquidity, helping to keep funding costs competitive as opposed to going offshore for funds. “We are able to sell through bonds and sukuk in the local market, so it is not for us at this point to have US dollar issues or issues in any currencies other than the Malaysian ringgit,” Choy said.
The Sukuk ALIm is just one of the new Islamic structures that Cagamas has offered to the market since the government set it up to help develop the private debt securities market, as well as to offer affordable housing loans by increasing liquidity for the country’s mortgage lenders. Cagamas dominates the PDS segment with a 10% share of the overall bond market. In the AAA rated segment, Cagamas commands a 30% share. Along the way, Cagamas has introduced Islamic commodity Murabahah, the first Islamic RMBS and the first Islamic floating-rate securitisation of small- to medium-sized enterprises.
“About half of our outstanding bonds are in sukuk,” said Choy. “Not many institutions are like Cagamas that can develop a particular forte in sukuk capability and be able to push Islamic issuances as much as we can.”
The government-owned agency is now drawing up its next new Islamic product. “We are working on a new sukuk structure that will be innovative and will be a landmark of its type,” said Choy. He declined to provide details, except to say that the company had quietly sounded out the investment community for feedback on the structure. No timetable has been set for the new issue, and no banks have been officially mandated. Cagamas will need to package matching assets to back the new sukuk before it can sell the deal.
Cagamas will remain active in the market for the rest of the year. It has a funding target of M$9bn–$10bn, but it has, to date, issued just over M$5bn in both conventional and Islamic bonds. This reflects a slowdown in the banking sector this year, relative to 2009. Cagamas only needs to issue bonds when banks sell it housing loans.
Kit Yin Boey
