Malaysian SWF Khazanah Nasional Returns to International US Dollar Market with a Dual-Tranche US$1bn Sukuk Issuance After Absence of Five Years

No sooner had the Government of Malaysia’s pioneering maiden US$1.3 billion Sustainability Sukuk marked the market in April 2021, the country’s sovereign wealth fund (SWF), Khazanah Nasional Berhad launched its latest foray into the international Sukuk market with its own two-tranche US$1 billion offering at end April/early May.

Within a space of two weeks, sovereign Malaysia raised US$2.3 billion from the international market. The SWF founded in 1993, has current uncertified assets under management estimated at US$30,492,200,000 by the SWF Institute.

It is by far the most proactive Sukuk issuer among SWF’s especially from OIC member countries and has pioneered Sukuk structures based on the Islamic principle of Wakalah bil Istithmar in the SRI and CSR space where the proceeds will be used to fund eligible Shariah-compliant SRI projects in education, community capacity building and upliftment projects. The SWF had mandated CIMB, DBS Bank Ltd., J.P. Morgan, MUFG and OCBC Bank as Joint Lead Managers and Joint Bookrunners in April 2021 to arrange a series of virtual investor calls with accounts in Asia, the Middle East and Europe. KFH Capital and Warba Bank acted as Joint Lead Managers to the transaction.

This latest Khazanah offering comprises a 5-year US$400 million Sukuk Wakalah due 2026 and a 10-year US$600 million Sukuk Wakalah due 2031. Both were issued via a Labuan-incorporated special purpose vehicle, Dua Capital Ltd, on behalf of the Obligor, Khazanah Nasional Berhad.

The Sukuk tranche price guidance was initially 125 basis points (bps) over the 5-year US Treasury yield and 150bps over the 10-year US Treasury yield. The transaction was six times oversubscribed, says Khazanah, and attracted strong demand across Asia, Europe and the Middle East, and the order book was at a high of about US$6.0 billion when Khazanah revised the price guidance tighter by 40bps and 30bps to finally print the Sukuk at a profit rate of 1.658% and 2.780% respectively.

The Sukuk tranches, each of which is structured under the Shariah principle of Wakalah utilising Shariah-compliant shares and commodities, are listed on Bursa Malaysia Securities Berhad (under an Exempt Regime) and the Singapore Exchange Securities Trading Limited (SGX-ST).

Khazanah Chief Financial Officer, Faridah Bakar Ali, stressed that the “overwhelming demand reflects investor confidence in Khazanah’s credit and our ability to deliver the mandate as Malaysia’s sovereign wealth fund. This issuance will extend our liability duration as we continue to rebalance our portfolio.”

Proceeds from the issuance will be utilised for general investments, refinancing of borrowings and working capital requirements of Khazanah which are Shariah compliant.

Khazanah last issued a Sukuk in the international US dollar market in February 2016, with its debut 5-Year US$750 million offering, issued by its SPV, Danga Capital Berhad under its Multicurrency Islamic Securities Programme. It was priced at a profit rate of 3.035% per annum and, despite challenging market conditions, Khazanah achieved its target issue size at a spread of 178 basis points above prevailing 5-year US Treasuries.

As at 31 December 2020, Khazanah had interests in more than 100 companies, either directly or indirectly through ownership of shares. These companies are involved in various sectors such as media and communications, financial services, power, healthcare, property, transportation and logistics, innovation and technology, infrastructure and construction, creative, leisure and tourism, sustainable development, consumer, life sciences, agriculture, wellness and education, amongst others.

Last year was a difficult year: Khazanah’s profit from operations fell to RM2.9 billion in 2020 as compared to RM7.4 billion in 2019. Dividend income from investee companies rose to RM5.2 billion from RM3.8 billion but was offset by lower divestment gains of RM2.7 billion compared to RM9.9 billion in 2019.The impact of the COVID-19 pandemic led to higher impairments of RM6.0 billion, particularly in aviation and hospitality assets, compared to RM4.9 billion in the previous year. Khazanah declared a dividend of RM2.0 billion for 2020 to the Government of Malaysia.

Against this, Khazanah’s financial position remained strong with debt reduced by 6% to RM43.1 billion from RM45.8 billion in 2019, while Realisable Asset Value cover fell slightly to 2.9 times from 3.0 times.

Khazanah Managing Director Datuk Shahril Ridza Ridzuan explained that Khazanah’s “performance in 2020 was accomplished against the backdrop of a challenging economy and unprecedented impact to the operating environment caused by the COVID-19 pandemic. Despite these challenges, we were able to build on our efforts in recent years, allowing us to navigate the economic uncertainty. We identified good investment opportunities during the pandemic and ensuing market volatility. Khazanah continues to diversify our global portfolio as we build sustainable value for Malaysia as part of our long-term mandate.”

Looking ahead to the next few years Khazanah has identified five Strategic Priorities including “further enhancing our commercial returns, delivering impactful value through our strategic investments, becoming a responsible organisation through embedding ESG considerations across all investment activities, building a strong digital and technology foundation and finally, investing in our people to achieve a culture of high performance and collaboration.”

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