A bold and calculated move

Malaysia’s global sukuk issue a huge RM4bil success

Tan Sri Wan Abdul Aziz Wan Abdullah

 

THE announcement to launch a global sukuk on May 19 was greeted with a lot of questions, doubts and scepticism. This was due to uncertainties caused by the sovereign debt crisis, particularly in Greece, Spain, Portugal and Ireland, which accentuated concerns over a double-dip recession.

Notwithstanding this, we went ahead with the launch after taking into consideration the factors in favour of Malaysia. These include the strong demand for good quality sovereign debt papers in the market; Malaysia’s credit risk spreads, which had narrowed considerably; the country’s good credit story supported by sound economic fundamentals; and clear economic transformation agenda under the New Economic Model.

It was a calculated and bold move. We were proven right when the issue was oversubscribed by nearly six times the initial size of US$1bil (RM3.25bil).

The issue was a huge success with a final sukuk size of US$1.25bil (RM4.06bil). It was Malaysia’s first in the international debt market after a lapse of eight years and was accorded emas, a special recognition given to foreign currency denominated issues in the Malaysian capital market.

The global sukuk has three objectives: to establish a new US dollar benchmark as pricing guidance for corporate fund raising, to profile Malaysia’s credit story in international capital markets, and to showcase the country as a global Islamic financial hub. The issue successfully met these objectives.

In line with Malaysia’s leadership in Islamic finance, the issue was structured as a syariah-based Ijara − an asset-based Islamic instrument, which pays sukuk-holders returns from the rental of 12 government-run hospitals.

The purchase price is equivalent to the proceeds raised by the special purpose vehicle – 1Malaysia Global Sukuk Sdn Bhd (the trustee/issuer).

It is a sale and lease-back arrangement, where the Federal Land Commissioner as the land owner of the 12 hospitals would sell the asset to the trustee which will lease the assets to the Government. Rentals received will be used to make periodic payments to sukuk investors.

Upon maturity, sukuk holders will be paid the redemption sum through the proceeds received from the Government as the obligor who will purchase the rights, interest, benefits and entitlements on the lease assets from the Trustee. (See chart on transaction structure)

The sukuk was assigned a rating of A- by Standard and Poor’s and A3 by Moody’s. The credit ratings reflect Malaysia’s sovereign credit worthiness backed by a deep and liquid domestic capital market, a well-managed and resilient financial system, strong external position, net external creditor position as well as a diverse and competitive economy.

The global sukuk roadshows started off with a team lead by Second Finance Minister, who met investors in Jeddah, Riyadh, Abu Dhabi and Dubai. The second team led by the Finance Ministry secretary-general saw investors in Hong Kong, Singapore, London and finally in New York, where the sukuk size and pricing were finalised.

During the roadshows, the teams met investors in groups and also had one-on-one interactions with key investors. Investors raised questions on Malaysia’s fiscal sustainability, economic fundamentals as well as the reform agenda of the Government. The teams took the opportunity to explain Malaysia’s economic policies, the accommodative monetary policy as well as impressed upon the investors the reform agenda and growth prospects that will be realised through the New Economic Model.

Fundamentals intact

Investors were convinced that Malaysia’s fundamentals remained intact, with strong fiscal position and credible economic growth from enhanced reform initiatives under the New Economic Model.

These meetings were well-received and generated significant interest among investors in Asia, the Middle East, Europe and the United States, despite increased uncertainty and market volatility created by the debt crisis in Greece.

The high-level delegations were instrumental in raising Malaysia’s profile and entrenching its growth prospects among key investors and decision-makers.

As a result, the issue attracted bids from a diverse group of over 270 investors around the world with most bids from Asia and the Middle East.

The final distribution reflected the wide interest among global institutional investors for Malaysia’s debt papers. (See table on final distribution of global sukuk )

It also reinforced Malaysia’s lead position in the global sukuk market, accounting for 65% of global outstanding sukuk.

The initial proposed size of the global sukuk was US$1bil, which was upsized to US$1.25bil after receiving bids of about six times over the initial cover, making it the largest global sovereign sukuk ever.

The five–year sukuk was priced on May 27 to yield 3.928%, the lowest yield for an Asian sovereign issue in the last five years.

In New York, where the pricing was to be decided, the global markets had turned volatile threatening to scuttle the whole exercise. However, with a strong order-book from Asia and the Middle East, a small window of opportunity appeared when the market stabilised.

Bold and quick decisions were made to capitalise on it. The price “whisper” began at around the Treasury+200 basis points range and the order-book started to fill up and demand momentum was sustained.
With such an encouraging order-book, the pricing guidance was issued at Treasury+190 basis points and finally the issue was priced to yield 3.928%.

The final pricing at Treasury+180 basis points was very competitive, given the uncertainty and volatility of markets caused by the ongoing Greek debt crisis.

The spread on the five-year sukuk due in June 2015 further narrowed by six basis points a day after listing, reflecting robust demand for Malaysia’s dollar debt.

It was challenging to launch and conclude the largest sovereign sukuk ever at the lowest price for an Asian sovereign issue in the last five years. Despite the volatile markets, there was overwhelming response to the global sukuk, reflecting investor confidence in Malaysia’s credit story and growth prospects.

We must sustain this confidence by implementing all reform measures, however painful it may be in the short term. We must sacrifice for the greater good of the nation in the long run.

The success of the global emas sukuk is indeed an international recognition and endorsement of Malaysia’s credit story and confidence in the reform agenda of the New Economic Model under the leadership of Prime Minister Datuk Seri Najib Tun Razak.

“Our sukuk offering was priced at the lowest yield achieved by an Asian sovereign in the past five years notwithstanding volatile market conditions. We also had wider investors base from Asia, the Middle East, Europe and the US. This is a great achievement for Malaysia.”

● Tan Sri Dr Wan Abdul Aziz Wan Abdullah is the Finance Ministry’s secretary-general of Treasury.

Financial literacy vital to achieve high income status

COMMENT By CAROL YIP

THE first report on the New Economic Model (NEM) for Malaysia presents a clear message for radical change in our approach to economic development. The stated goal is to enable Malaysia to reach high income status by 2020.

The National Economic Advisory Council, which came up with the report, recommends that businesses must heighten their appreciation of people as valuable assets that they must collaborate actively with to make Malaysia a sustainable and vibrant nation.

However, the recent announcement of likely subsidy reductions on essential items has raised the spectre of many Malaysians experiencing an increase in inflationary pressure. While there is much commentary in the media focusing on how to help the poor, the aged and middle-income wage earners, we need to collectively and individually solve the problem so that we can speed up the process and reach these goals as a society. The year 2020 may seem a long way off, but nine years is not a long time to achieve these lofty NEM goals.

The Government cannot expect Malaysians to continue showing excellent work performance to contribute to economic growth when we experience personal financial stress in our day-to-day lives. Unless we have salary increases that align with living costs and the Government heightens its efforts to work with the business community, things may stall.

Without the financial security and benefits as envisioned in the NEM goals of “inclusiveness” and “sustainability” to improve the rakyat’s quality of life, the majority of our society will continue to experience a bleak financial future, culminating with an unsustainable retirement.

Stuck in the middle income trap

While the Government is trying to put things in order to help us get out of the middle income trap to reach a high level income society, there is still a missing link. We need to start looking into a national strategy to help Malaysians improve their personal financial literacy and develop the necessary skills to keep their personal financial matters in the proper perspective.

There are several transitions that Malaysians must navigate through as they grow from children, through wage-earner, on to retirement. Each stage requires an understanding of personal financial matters that are sorely lacking in most of us.

Financial literacy is important to everyone. Financial stress is not biased based on race, age, gender, marital status or different income groups. Just because a person might be below the middle-income group doesn’t mean he or she may need financial education more than others. Just as likely, the children of wealthy parents need to be educated to maintain family wealth. Similar to reading and writing literacy, financial literacy is necessary to all. When a nation has a high level of financial literacy, it is easy to promote healthy financial ethics and values across different generations, from young to the old.

What other countries are doing

In 2008, the Organisation for Economic Co-operation and Development (OECD) launched the International Gateway for Financial Education to serve as the first global clearing house on financial education. It seeks to raise awareness to ensure wide dissemination of research, best practices and guidelines and build a worldwide network of government stakeholders on financial education. Several countries, most of whom are members of the OECD, have developed and implemented national strategies on financial literacy:

Australia: In 2005, the government established the Financial Literacy Foundation (FLF) to implement a national literacy strategy. The FLF worked to integrate financial literacy into the educational system, to develop resources and support for teachers and to provide financial literacy materials for the workplace. In July of 2008, all of FLF’s functions were transferred to the Australian Securities and Investments Commission, in order to consolidate the Australian government’s financial literacy response under the Commission and to strengthen its role in safeguarding Australia’s economic reputation and well-being.

New Zealand: A crown agency, the Retirement Commission, led the development of New Zealand’s National Strategy for Financial Literacy, in 2008. The New Zealand Retirement Commission also created “Sorted”, an independent government-funded organisation dedicated to helping New Zealanders manage their personal finances, throughout their lives. In 2009 the Ministry of Education also took over all responsibilities for financial education in schools.

Singapore: The national financial education programme MoneySENSE was launched in October 2003 to bring together industry and public sector initiatives in financial education, to create a long-term sustainable programme to enhance the basic financial literacy of Singaporeans. Through its national MoneySENSE programme, the Singapore government continues to support initiatives that enhance the basic financial literacy of consumers.

The Netherlands: Under the working title CentiQ (Sensible with Money), around 40 partners from the financial sector, the government, information and consumer organisations and science centre signed an agreement in 2006 to work together on financial education. Together, the partners carry out a strategic agenda that includes programmes and projects aimed at improving the financial knowledge and skills of consumers and stimulating an active attitude, so that consumers can make conscious financial choices and become financially competent.

Getting our house in order

Malaysia shouldn’t be left behind. We need a concerted effort to create a national financial education blueprint. Let’s start transforming the nation with a new attitude and mindset by emphasising building a “made-in-Malaysia” financial education programme in schools, tertiary institutions, workplaces, community centres and NGOs.

There are some stakeholders who are already educating different parts of our society according to their core business objectives. A central regulatory body is required to consolidate existing financial education programmes and be the centre of influence to create a national strategy to improve the nation’s financial literacy level based on sound ethics and core values, and in line with the NEM goals.

·Yip is a personal financial coach and also founder and CEO of Abacus for Money

Systemic risk a puzzle or mystery?

THINK ASIAN By ANDREW SHENG

MALCOLM Gladwell deserves his reputation as one of the most brilliant and popular writers today. His books – The Tipping Point: How Little Things Make a Big Difference, Blink: The Power of Thinking Without Thinking, Outliers: The Story of Success – all became No. 1 bestsellers.

I just read his latest book, What the Dog Saw, actually a compilation of his New Yorker magazine articles. He is brilliant because he looks from an angle that most of us miss. He did not think what you and I think when talking about a dog; he looked at what the dog thinks.

In the chapter titled Enron: Open Secrets, Gladwell posed the right question: Was the failure of Enron a puzzle or mystery?

A puzzle is something that can be solved with extra information. A mystery is a question that may not have simple answers, requiring judgment and the assessment of uncertainty. “The hard part is not that we have too little information, but that we have too much,” he wrote.

He concluded that Enron was not a puzzle, but a mystery, since Enron disclosed most of the information according to the (then) accounting rules. Exactly like the current crisis, Enron had the best professionals working for the company, but no one stopped the company producing misleading accounts until it was too late.

In this age of high transparency, crises happen openly. Why? In Enron, Gladwell posed the issue: “It’s almost as if they were saying, ‘We’re doing some really sleazy stuff in footnote 42, and if you want to know more about it, ask us.’ And that’s the thing. Nobody did.”

Gladwell asked, “Had we taken the lessons of Enron more seriously, would we have had the financial crisis of 2008?”

Right question. But why did nobody, especially policymakers and regulators, ask the right questions? Is the current global crisis a puzzle or mystery?

There is general acceptance by financial regulators (in hindsight) that what we all missed during the current crisis is systemic risk, which is defined in Wikipedia as “the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system”.

It can also be defined as the serious destabilisation of the financial system, caused or exacerbated by failures in parts of the system that spreads through the financial system and the real sector.

Systemic risks are risks passed through common interlinkages and interdependencies in a system or market, through contagion that leads to a system-wide cascading failure.

Most regulators would agree that systemic risks are not usually measured by micro-prudential regulators, who focus mostly on institutions or processes. It is now fashionable to talk about “macro-prudential regulation”.

The current reforms in the United States and European Union vigorously debate how to measure, monitor and control systemic risks. These range from creating an independent “financial stability council” specifically to comment on systemic risks, the use of a tax to reduce systemic risks, and more regulations and reporting requirements.

Everyone seems to agree that we need to control the “too big to fail” banks and the “too interconnected to fail” smaller institutions, such as hedge funds. There is general agreement that all scope of regulation should cover all institutions that generate systemic risks.

The trouble with controlling systemic risks is that they are not easily identified. We know that systemic risks are generated by behaviour, that they are inherent in eco-systems and that they have macro as well as micro origins. But we do not know the trigger when these risks begin to cause real problems.

We now face the Gladwell question: Is systemic risk a puzzle or mystery?

If it is a puzzle, then if we find the right information, we can have the right solution. But if it is a mystery, then we may have to think about the problem completely differently.

Gladwell thinks that puzzles are “transmitter-dependent”, depending on what we are told. Mysteries are “receiver-dependent”; they depend on the skills of the listener. If the public does not understand the risks, then the risks will happen.

Systemic risks are related to the system as a whole and also the behaviour within the system and also the commonalities within the system that create the contagion.

Understanding this means that we need to understand not just the dynamics of the financial system itself (what is endogenous to the financial sector), but also the complex exogenous inter-relationships within the financial sector and the real sector.

It means that we have to understand the reflexive actions between parts of the real and financial sectors.

This is an epistemological question, the science of the limits of knowledge. Suppose we have a super computer that is able to digest every bit of information, can we accurately estimate systemic risks? What if systemic risk stems from the fact that the externality of what we do (everyone in the financial system) generate enough spillover effects that create a massive disaster?

In other words, are we dealing with the unknown unknown? These are sometimes called acts of God.
Perhaps the recent preoccupation with risk management models and information systems that assume that we can calculate all the risks is wrong.

We now know that the current generation of risk models cannot cope with Black Swan or extreme event risks.

Risks can be reduced in four main ways: avoidance, diversification, hedging and insurance by transferring risks. The current generation of regulators thinks that diversification, hedging and insurance is a science that can be measured. This crisis proved that they are wrong. There is much about systemic risks that we do not understand.

Hence, it is better to have ample capital and simple “avoidance behaviour” or prudence in whatever we do. Regulators have the unpleasant task of saying no when no one understands what the risks are.

Risk prevention or avoidance is still an art, not a science. We need to be humble that we do not yet fully understand how our systems work or fail, hence the need to be “balanced” or finding the golden mean. When everyone thinks something is right, it could very well be wrong.

·Tan Sri Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission, and is currently a member of Malaysia’s National Economic Advisory Council.