islamic finance

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ISLAMIC BONDS (SUKUK) CASE STUDY (6)

Malaysian Global Sukuk US$600 million Sukuk Al-Ijarah Trust Certificates by Malaysian Global Sukuk Inc

Case Writer: Brian Kettell

www.islamicbankingcourses.com

This case describes the Malaysia Global Sukuk .It is intended to be used as the basis for class discussion. Answers are not provided. It is expected that the course leader will guide participants accordingly. .

Case Abstract An Islamic bond (sukuk) has economic characteristics similar to those of a conventional bond, but is structured so as to be compliant with Shari’a law and can be sold to Islamic investors who are prohibited by Shari’a law from investing in conventional debt securities. This case describes the Malaysia Global Sukuk .The purpose of the transaction was to enable the Government of Malaysia to raise financing in accordance with Shariah principles.

‘Those who take riba (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch.’

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Qur’an Sura 2:275-280

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On July 3, 2002, the government of Malaysia issued trust certificates worth US $ 600 million that were due in 2007. Each of the trust certificates represents an undivided beneficial ownership of the trust assets that are land parcels. The proceeds from the issuances were implemented to develop the land parcels that consisted of four areas of construction: • Selayang Hospital, a government owned hospital operated by the Ministry of Health. • Tengku Ampuan Rahimah Hospital, a government owned hospital operated by the Ministry

of Health. • Government living headquarters in Jalan Duta. • Jalan Duta Government Office Complex (including Ministry of Finance, Ministry of

International Trade and Industry, and Inland Revenue Board offices). The Malaysia Global Sukuk was incorporated in Labuan, Malaysia as a Special-Purpose Vehicle solely for the purpose of participating in the sukuk issuance transactions. The general structure of the sukuk issuances is similar to the Qatar trust certificates. An SPV is created to buy the land parcels from the government (that is funded by both Islamic and conventional investors) which are then leased back to the government that pays out rental payments matching the semi-annual distribution amounts to the sukuk. Indeed, this is the generic arrangement of ijarah sukuk issuances. See Figure 1. Under the framework of the Malaysian prospectus, the “Master Ijarah” agreement entitles the government to distribute semi-annual lease payments with reference to LIBOR + 0.95% that would exactly match the distributions to the sukuk holders. After the expiry of the agreement in 2007, the government will buy back the properties at face value effectively protecting the bond issue from any variations in the value of the underlying assets. The rental return is guaranteed by the government of Malaysia, and the trust certificates are thus equivalent to floating rate Malaysian sovereign debt instruments. The certificates were rated “Baa2” by Moody’s Investor Services and “BBB” by Standard & Poor’s Rating services. The lead manager of the issuance was HSBC and the co-managers included ABC Islamic Bank, Abu Dhabi Islamic Bank, Bank Islam, Dubai Islamic Bank, Islamic Development Bank, Maybank International and Standard Chartered Bank. As with the Qatar prospectus, applications were made to list the certificates on the Luxembourg Stock Exchange and the Labuan Financial Exchange. Malaysia Global Sukuk

Country Issuer Type Value Maturity

Malaysia Ministry of Finance, Malaysia

Global Islamic Ijarah Sukuk

US$ 600 Million June 2007

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F ig u re 1 : M a la y s ia n S u k u k a l- Ij a ra

T ra n s a c ti o n s tr u c tu re :

M a la y s ia

M a la y s ia

G lo b a l S u k u k

In c

F e d e ra l L a n d s

C o m m is s io n e r

S u k u k

S te p 2 : M a la y s ia G lo b a l S u k u k I n c e n te rs i n to

a M a s te r Ij a ra h A g re e m e n t w it h M a la y s ia

S te p 3 : M a la y s ia G lo b a l S u k u k I n c i s s u e s

S u k u k re p re s e n ti n g u n d iv id e d

p ro p o rt io n a te o w n e rs h ip i n t h e

u n d e rl y in g l a n d p a rc e ls

S te p 1 : T h e F e d e ra l L a n d s C o m m is s io n e r s e lls

b e n e fi c ia l in te re s t in t h e L a n d P a rc e ls t o

M a la y s ia G lo b a l S u k u k I n c f o r

U S $ 6 0 0 m ill io n

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Malaysian Global Sukuk: Case Study questions Following the recent string of successful Sukuk issues, and the fact that they are a relatively new concept in corporate finance, your employer, an Investment Bank, has selected your group to make presentations to the Board regarding the key issues involved. Your group must consider the following questions and you must present your findings to the whole class. Please be ready to explain any technical concepts to the class. You will be expected to defend your answers. Remember that “time is money” and that your responses must be succinct and not overly descriptive. In other words – get to the point!! In answering the questions below you are expected to make extensive use of the Internet. 1. Describe the exact nature of the Malaysian Sukuk 2. What Islamic modes of finance underpin the Malaysian Sukuk? 3. Describe how these modes of finance work and the exact relationship they have with

the Malaysian Sukuk 4. What are the prospects that the Malaysian economy will good investment returns?

Explain your views. 5. Are Malaysian Islamic capital markets different from those in the Gulf States? 6. What Sharia Board requirements were put in place? 7. Are issues of corporate governance relevant to this issue? 8. What was innovative about this issue? 9. How was the issue rated and by whom? 10. Was the issue a success? 11. What lessons can be learnt for the issue of future sukuk? How do the critical factors for

Malaysia Sukuk compare with those for the other Sukuk issued.?