The Malaysia sovereign ended an eight-year absence from the international debt markets with the issue of a $1.25 billion sukuk, or Islamic bond, early Friday morning. The 144A/Reg-S registered securities were issued with a five-year bullet that has been set to mature on June 4, 2015.
With a 3.93% fixed-rate coupon and an issue and reoffer price at par, this is only the second bond to be issued by an emerging market country in the past five years to yield below 4% -- and the first ever by an Asian emerging market sovereign. The last country to issue at sub-4% was Russia, which sold a $5.5 billion dual-tranche bond in April that paid a yield of 3.741% on the $3.5 billion five-year tranche.
Malaysia is rated A3 by Moody's and A- by Standard and Poor's, which may have contributed to the low yield. As one banker said, "with the A rating, Malaysia is one of the more premier credits among the emerging market sovereigns".
The issuer took advantage of the first window of stability to surface in the past two to three weeks. And, in order to limit the execution risk, the deal was completed within a tight 12-hour window. "It took a lot of courage to go out and take the leadership when no one else is testing the market," said one banker.
With the ongoing volatility in the marketplace, generally the deals in the pipeline have stayed put. In fact, one source close to the Malaysia sukuk said the arrangers on the deal -- Barclays Capital, CIMB and HSBC -- had told the Ministry of Finance that the market was not as constructive as the banks would have liked to see. Their advice was to remain nimble and wait for the appropriate window.
When it was clear that last Thursday was the window of opportunity the issuer was after, the arrangers hit the street with an unofficial whisper for a yield spread in the Treasuries plus 200bp area. This was quite a generous benchmark, which, according to one source close to the deal, was set to keep investors interested during the roadshow discussions. And the move seems to have paid off, with strong investor demand resulting in a final order book of $5.5 billion from 235 accounts.
Formal guidance was issued during the Asia trading session at Treasuries plus 190bp area, and this was later revised down even further to 180bp to 190bp over Treasuries. At the time of that final guidance, the arrangers also told investors that the deal would price within that range. The final price was fixed at the bottom of the range at Treasuries plus 180bp, for a yield of 3.93%.
On the day of pricing, the US was auctioning a new five-year Treasury bond, but the spread was fixed off the 'old' five-year benchmark.
By the time the New York session closed on Thursday, the Malaysia sukuk had already tightened to 175bp. But by the opening of Friday's session in Asia, the benchmark had rolled over from the old five-year notes to the new ones. Based off the yield of the new US Treasuries, the Malaysia bond was quoted at a spread of 170bp at the start of Asian trading. However, while that spread suggested a tightening of 10bp since pricing, a comparison against the new five-year benchmark would be slightly different than against the old notes, one banker explained.
Taking into account the differential between the old and new curves, the Malaysia bond was trading 7bp to 8bp tighter than where it priced, he said.
As the first bond to come out of Asia in two weeks, investors were eager to lap up the debt. Demand was particularly strong from Middle Eastern investors, which represented 26% of the order amount. Malaysian and other Islamic investors accounted for 18%; the rest of Asia 21%, Europe 20% and the US 15%. Banks bought 41% of the deal, asset and fund managers 36%, central banks and sovereign wealth funds 11%, insurance and pension funds 6%, private banks 3%, and corporates and other types of investors 3%.
It wasn't just a lack of new issuance in general that drove investors to buy into the bonds -- but quite specifically a craving for Malaysian paper. As mentioned, Malaysia had not hit the market with a sovereign since 2002 and the country has only issued international debt three times over the past 10 to 15 years. Other Malaysian issuers have also been quite inactive in the international debt markets with only one issue so far this year -- from mobile phone operator Axiata Group, which priced a $300 million 10-year bond in April. Therefore the deal presented a strong scarcity value that investors were keen to latch on to.
A key reason why Malaysian corporates and the Ministry of Finance have historically not turned to the offshore markets for funding is the level of onshore liquidity. One source said earlier that the government has no urgent need to get international funding, due to the well-funded domestic market. Thus, the government's decision to specifically target the sukuk and Islamic investor base was as much a marketing exercise as an act to raise funds.
"The Islamic investor is very constructive," said one banker, referring to the strong support for the bond from the sukuk investor base, which helped drive the momentum in the bookbuilding. "Knowing the type of investor base that is being targeted puts comfort with the issuer in ensuring at least a good start on the order book," said another source.
And this was exactly what the market observed. By the time the informal whisper was suggested to the market, the arrangers had already secured a strong order book of more than $500 million. By the end of the Asian trading session the book had grown to about $4 billion. The opening of European trading added a further $1 billion and by the time books closed, at 9am New York time, US investors had contributed another $500 million.
At the recent World Islamic Economic Forum in Kuala Lumpur in late May, Malaysian Prime Minister Razak announced the Ministry of Finance's intention to issue a benchmark deal in the sukuk dollar market. The move is in line not only with the government's plan to become a global hub for Islamic finance but also with its aim to open up the markets and bring back foreign investment into Malaysia. The Ministry of Finance expects this deal to pave the way for Malaysian corporates to hopefully follow suit with sukuk and dollar issues of their own.
"Whether they'll jump in and take advantage right away is still dependant on the markets," said one source close to the deal. The forecast for the market is that it can still potentially turn lower over the next couple of weeks. Therefore, Malaysian and other regional corporates may still remain cautious.
However, as demonstrated by this deal, there is enough liquidity out there and investors still want to dispose of their cash. In particular, the market may be receptive to high-grade issuance. Indeed, given its large size, it is likely that the Malaysian sukuk will act as a benchmark not only for the Malaysian market but also for other regional issuers looking to price -- in particular, high-grade issuers.
It is expected that if there is another day of stability during the course of this week, high-grade issuers from Asia and the emerging markets may look to bring the type of intra-day deals that have become the preferred option during this period of volatility.
