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Monday, 9 August 2010

Malaysia : New sukuk issue to refinance DUKE debt

The sukuk issuance is needed as there's a mismatch between the asset and the company's financing requirements, says a source

The owner of the Duta-Ulu Kelang Expressway (DUKE) plans to restructure its RM780 million debt to rectify its funding-concession mismatch, and has approached Danajamin Nasional Bhd to ensure the success of its new Islamic bond.

"There is a need for a new sukuk issuance as there's a mismatch between the asset and the company's financing requirements," said a source familiar with the latest proposed issuance.Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd (Kesturi) was given a 34-year concession to design, construct, operate and manage DUKE in August 2004. The company is wholly owned by Nuzen Corp Sdn Bhd, which in turn is 70 per cent held by Wira Kristal Sdn Bhd and 30 per cent by Malaysian Resources Corp Bhd. Under a debt restructuring exercise, Kesturi will issue a senior sukuk of up to RM780 million and a junior sukuk of up to RM50 million for a 17-year tenure.  Proceeds will be used to redeem an earlier sukuk issued in October 2005. Kesturi will also seek a Danajamin guarantee for the senior sukuk issuance, based on an Ekovest Bhd announcement to Bursa Malaysia two weeks ago.  However, Business Times has learnt that the guarantee is likely to come with conditions, including a top-up of funds by shareholders of the company.  When contacted by Business Times, Kesturi declined to comment on its proposed sukuk issuance or its debt restructuring exercise.  After consulting with its lead arranger CIMB Investment Bank Bhd, a Kesturi spokesperson said it was unable to provide information as the restructuring was in the final stages and would be firmed up within a month or so.  Kesturi's sukuk issuance five years ago was also RM780 million, for a 13-year tenure to finance the construction of DUKE.  The amortisation of this sukuk is spread over nine years, with the first sukuk redemption of RM50 million due this October.  Although a proposed issuance date for the new sukuk is still being firmed up, the company is likely to raise funds soon.  A Malaysian Rating Corp Bhd (MARC) report issued in January said the company's management had admitted that slower traffic would mean a greater risk of not meeting debt conditions and repayments.  The report also said that toll revenues were expected to be insufficient to cover Kesturi's April 2010 profit payment although a shortfall was likely to be funded using its finance service reserve account maintained under the sukuk.  DUKE, which saw its first phase completed in December 2008, opened fully last May, slightly behind its original schedule. (Business Times)

Maldives issues first Islamic bank license

MALE, August 4, 2010 (HNS) - Maldives Monetary Authority (MMA) Tuesday issued license to Maldives Islamic Bank Private Limited (MIB) to set up the country’s first Islamic bank.

According to the authority’s website, “MMA issued a banking licence to the ‘Maldives Islamic Bank Pvt. Ltd.’ to conduct Islamic banking business in the Maldives, with effect from 2nd August 2010.”

An MMA official told Haveeru that an Islamic bank could be established under the current commercial banks regulations.

“These regulations are suitable for any kind of bank. But we are drafting specific regulations for Islamic banks before the first establishment,” he said.

MIB Managing Director Harish Haaroon said the company would set up the bank by the end of 2011. 

“We hope that the bank will be established within the next six months according to MMA regulations,” he said.

A press release issued by the company read that the bank was formulated on April 1 by the government in collaboration with Islamic Corporation for the Development of Private Sector (ICD). While the government and ICD signed the agreement on October 4, 2009 a Memorandum of Understanding (MoU) was reached on April 12, 2007.

The government also signed agreements with Dubai International Finance Centre’s Ridge Solutions International Holdings on October 15 and Dubai’s Noor Islamic Bank on July 7, 2008.

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Islamic banks advised to capitalise on inherent strengths

KARACHI: Acting Governor State Bank of Pakistan, Yaseen Anwar, said Islamic financial system has potential to provide better banking and financial services than the conventional system.

However, he added, the Islamic system would have to capitalise on its own inherent strengths and avoid following the conventional system, he said while addressing the inaugural session of Islamic Financial News Roadshow on Islamic Banking held at SBP Headquarters here on Thursday

Anwar Yaseen said that the current Islamic banking paradigm, both in Pakistan and elsewhere, is based on replication of conventional banking products. While the replication of conventional products to make them Shariah compliant does pass the Shariah permissibility test, they are insufficient to achieve the larger objectives of Islamic financial system, particularly the broad-based and equitable distribution of economic gains.

He asserted that total reliance of Islamic banks on debt-based fixed income products and minimizing the risks to almost close to those of the conventional system is not only blurring the distinction between Islamic and conventional finance but also making Islamic banks relatively less efficient than their conventional counterparts.

Thus, for sustaining the growth momentum, the industry will have to diversify its products mix by focusing on areas where it has comparative advantage rather than blindly following the conventional system, he observed.

While giving an example of Pakistan, Anwar said that 67 percent of Islamic banks’ financing in the country is concentrated in the corporate sector through murabaha, ijarah, and diminishing musharaka. 

With most of the corporates having banking relationships with conventional banks, the Islamic banks have to offer significant price discounts to attract the corporate clients, he said, adding that while this improves the quality of their financing portfolio, it reduces their profit margins and inhibits their ability to offer better returns to the depositors, he emphasised. 

It also restricts the access to finance to the well-established businesses and corporates and leaves the SMEs and start up businesses financially excluded. 

This is contrary to the natural business model of Islamic finance, which promotes risk and reward sharing and encourages financing to promising start-ups that is critically important for promoting entrepreneurial culture, he said.

(Daily Times)

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Sunday, 1 August 2010

Cagamas Sukuk: `Big Step' for Malaysian Middle East Sales

Duet Mena Ltd. and Algebra Capital Ltd., Dubai-based managers of $500 million, said they may buy Islamic bonds from Malaysia’s Cagamas Bhd., the first under a new structure that complies with the Persian Gulf’s requirements.
Cagamas, the nation’s biggest mortgage holder, plans to seek funds in the oil-rich region by offering 5 billion ringgit ($1.5 billion) of notes that meet the guidelines of the Bahrain- based Accounting & Auditing Organization for Islamic Financial Institutions. Fatwas, the judgment of a scholar based on his interpretation of Shariah law, from Malaysia aren’t generally accepted in the Middle East.
Demand from Dubai investors would benefit borrowers in Malaysia, the largest Asian sukuk market. Saturna Sdn., the Malaysian investment fund whose Washington-based parent oversees $3 billion of Islamic assets, said it is counting on the sale to attract funds from the Middle East.
“This is a big step forward and we will definitely be interested,” Rabih Sultani, who helps oversee $200 million at Duet Mena, said in an interview yesterday. “We had been reluctant to invest in Malaysia because of the different structure.”
Global standards are still developing in the Islamic finance industry, whose assets may almost triple to $2.8 trillion by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board. AAOIFI’s Secretary General Mohamad Nedal Alchaar said in an interview in May that his body planned to introduce the initiative to screen products and encourage greater harmonization of Islamic financial practices.
‘Bridge’ Laws
“This is the first time, as far as we know, that anyone, anywhere, has managed to bridge the Shariah laws in Malaysia and the Middle East,” Cagamas’ Chief Executive Officer Steven Choy said in an interview today. “For us to achieve this is a key milestone” in respect to market progress, he said.
Issuers from Persian Gulf states sold $2.5 billion of Islamic notes so far in 2010, down 24 percent from a year earlier, and the lowest level since 2005, data compiled by Bloomberg show. Global issuance fell 29 percent to $6.65 billion.
Cagamas will issue short- and medium-term bonds using a new Sukuk al-Amanah Li al-Istithmar structure, or Sukuk ALIm, according to a statement on July 13. Choy said then the company may offer 1 billion ringgit of notes within a month. London- based Royal Bank of Scotland Group Plc, Riyadh-based Al-Rajhi Bank and Kuala-Lumpur-based RHB Bank Bhd. will help arrange the sale, according to the CEO and a report from the official Bernama news agency.
Sukuk ALIm
“Sukuk ALIm are tradable in the secondary market, and since they preclude certain principles which may be contentious to Shariah, are expected to meet the requirements of a wider range of investors,” Ahmed Rehman, chief executive officer of Al-Rajhi Bank Malaysia, said at a press conference in Kuala Lumpur on July 13.
Cagamas and Al-Rajhi “have worked together in structuring the sukuk, so there will be no difficulty in getting it approved from our Shariah boards,” Duet Mena’s Sultani said.
The mortgage company raised 480 million ringgit from Islamic securities in 2006 and 2007 based on deferred-payment contracts, or so-called Bai Bithaman Ajil bonds, according to the company’s website. It separately sold 620 million ringgit of commercial paper and 8.85 billion ringgit of medium-term notes based on Islamic principles since 2007.
Malaysia Yields
The Bai Bithaman Ajil refers to a sale and purchase contract for the financing of an asset that allows for deferred payments and installments with a pre-agreed profit margin. Scholars in the Persian Gulf have said the structure doesn’t comply with Shariah because the profit is akin to an interest payment, which is banned under Shariah law.
Islamic bonds returned 7.1 percent so far this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while regular debt in developing markets gained 8.4 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 rose three basis points to 3.09 percent, according to prices from Royal Bank of Scotland Group Plc. The yield gap between the Dubai Department of Finance’s 6.396 percent sukuk maturing in November 2014 and Malaysia’s debt has widened to 435 basis points, from 356 basis points on June 10, reflecting growing appetite for Asian Islamic debt.
‘More Stability’
Saturna’s Chief Investment Officer Bryce Fegley said Asia’s economic growth and more advanced Islamic bond market may attract investors from Dubai or Qatar. Malaysia, the world’s biggest issuer of debt that adheres to Muslim principles, accounts for more than 60 percent of the $130 billion of outstanding sukuk.
“There’s a little bit more stability behind the Malaysian economy and the funding mechanism for sukuk and more harmonized standards from the regulatory perspective,” said Fegley, whose Kuala-Lumpur-based fund is a unit of Saturna Capital in Bellingham, Washington. The Middle East tends to attract the most “speculative money from the oil wells,” he said.
The World Bank predicted last month that economic growth in the Middle East and North Africa will accelerate to 4 percent in 2010 from an estimated 3.2 percent last year as oil prices rebound. Malaysia is forecast by the government to expand 6 percent this year after shrinking 1.7 percent in 2009.
Tarek Elalaily, head of fixed-income asset management in Cairo at Beltone Financial, which manages 21.7 billion of Egyptian pounds ($3.8 billion) of assets, said he wouldn’t consider buying the Cagamas bonds because they aren’t rated by Moody’s Investors Service or Standard & Poor’s.
“We would not currently look at issues that are not locally or internationally rated,” Elalaily said in an e-mail yesterday. “Internationally accepted sukuk standards would naturally be a key impetus for the sukuk market.”
‘Work in Progress’
Persian Gulf states aim to have a single Shariah board by 2013, Hussain Hamed Hassan, chairman of the Shariah Coordination Committee of the Islamic Financial Institutions in the United Arab Emirates, said in an interview in Dubai on June 10. The committee is a grouping of religious scholars aiming to standardize fatwas in the country.
Mohieddine Kronfol, a managing director at Algebra Capital, which has more than $300 million of assets under management, said he hopes the lead taken by Cagamas will promote more dollar-denominated sukuk from Southeast Asia.
“Global standards in Islamic finance are a work in progress,” Kronfol, whose company is a unit of San Mateo, California-based Franklin Resources Inc., which owns 40 percent of Algebra, said in an interview yesterday.
“Transactions that evolve from consultations with recognized bodies like AAOIFI and multiple regulators are typically accepted by a wider investor base,” Kronfol said.

(Bloomberg, 22 July 2010)

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