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Wednesday, 26 June 2019

Islamic Issue

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Malaysian construction group Ekovest won over investors in 2016 with a M$3.64bn (US$818m) project financing that featured a new sharia-compliant structure and set a record for the largest ringgit bond for a greenfield toll road project.

Lebuhraya Duke Fasa 3 raised the funds in August to help fund the construction of a 32.1km elevated expressway that will complete a critical ring road around the capital city.

AmInvestment Bank, acting as financial and principal adviser, proposed a Wakalah Bi al-Istithmar structure, combining the Wakalah, Murabahah and Tawarruq principles in an asset-light format.

The Wakalah concept, using an agency contract, addressed Duke 3’s lack of tangible assets and allowed the issuer to come to market at the greenfield stage. Most sukuk structures require physical underlying assets. The format is accepted in the international Islamic markets, but it is the first time the structure has been used for a greenfield toll road project in Malaysia.

Under the Wakalah Bi al-Istithmar structure, the sukuk holders will use an investment wakeel or agent, such as a financial institution, to invest the proceeds in a combination of assets and debt.

The assets comprise Duke 3’s 53-year operating concession and its construction activities. The debt component is a commodity Murabahah investment on a cost-plus format while the Tawarruq, a tripartite sale format, provides the platform.

The issuer ruled out using just the commodity Murabahah concept for the entire structure as this involved additional costs such as third-party brokerage fees.

Local rating agency Marc assigned a AA– rating, and Duke 3 printed 14 tranches on August 23, with tenors of 10 to 23 years and coupons ranging from 5.14% to 6.43%.

Malaysian investors embraced the new structure, with some expressing disappointment when their allocations were scaled back.

The completion of the deal was more remarkable when seen against the chequered history of toll road project bonds in the ringgit market, where a number had to be restructured. But Duke 3’s location in the heavily populated Klang Valley is expected to capture strong traffic flows.

The debt made up 83% of the M$5.05bn total project cost. It was also supported by a M$560m interest-free reimbursable interest assistance loan from the Federal Government of Malaysia, the first facility of its kind for a greenfield project. Ekovest’s M$850m equity injection made up the balance.

AmInvestment Bank was lead arranger and joint lead manager and bookrunner with CIMB, Maybank and RHB.

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