Malaysian SWF Khazanah Returns to International Market After an Absence of Two Years with an Inaugural US$750m Sukuk Oversubscribed Seven Times

Malaysian sovereign wealth fund (SWF), Khazanah Nasional Berhad returned to the international debt market on 25th May 2023 after an absence of two years with a dual-tranche aggregate US$1.5 billion senior offering, comprising a 5-year US$750 million Sukuk Wakalah/Murabaha due 2028 and a 10-year US$750 million conventional bond due 2033.

The issuance, according to the SWF, marks Khazanah’s first US dollar rated Sukuk and corporate bond out of its newly established US$5.0 billion Multicurrency Sukuk Issuance Programme and US$10.0 billion Euro Medium Term Note Programme through its wholly owned special purpose vehicles, Khazanah Global Sukuk Berhad and Khazanah Capital Ltd.

Khazanah had mandated BofA Securities, CIMB, DBS Bank Ltd., J.P. Morgan, Maybank, MUFG and OCBC Bank in early May 2023 to act as Joint Lead Managers and Joint Bookrunners to the transaction and to arrange a series of investor meetings and calls with accounts in Europe, Asia and the Middle East.

The Securities were launched at an initial price guidance of 135 basis points (bps) over the 5-year US Treasury yield and 160bps over the 10-year US Treasury yield for the 5-year Sukuk and 10-year conventional bond respectively. The transaction, says Khazanah, saw robust demand attracting over 200 investor accounts across Asia, Europe and the Middle East, with an oversubscription of more than seven (7) times.

The order book reached a peak of US$12 billion which led Khazanah to revise the price guidance tighter to 93bps and 118bps, issuing the Securities at a profit rate of 4.687% per annum for the Sukuk offering and an interest rate of 4.876% per annum for the conventional bond respectively.

Prior to this transaction, Khazanah’s last foray into the international Sukuk market was in May 2021 with an unrated dual tranche aggregate US$1.0 billion Sukuk offering, comprising a 5-year US$400 million in nominal value Sukuk due 2026 and a 10-year US$600 million in nominal value Sukuk due 2031. In 2016, Khazanah issued its maiden US dollar-denominated Sukuk, structured under the Sharia’a principle of Wakalah.

The May 2021 Sukuk similarly was launched at an initial price guidance of bps over the 5-year US Treasury yield and 150bps over the 10-year US Treasury yield. That transaction also garnered strong demand across Asia, Europe and the Middle East, and the order book was reached over US$6.0 billion (US$1.3 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% per annum respectively.

Dato’ Amirul Feisal Wan Zahir, Khazanah’s Managing Director welcomed “The overwhelming and widespread reception of our first ever rated Sukuk and bond, which underlines investors’ steadfast confidence in our creditworthiness and long-term strategy, amplifying our standing in the global capital markets. Investors accept and understand that Khazanah is a strategic investor and an intergenerational fund that can withstand short-term volatility. The issuance, which is carried out amidst volatile market conditions, will be the benchmark for Khazanah’s credit as we continue to rebalance our portfolio and strengthen our balance sheet as part of our strategy in advancing the country.”

Proceeds from the issuance will be utilised for general investments, refinancing of borrowings, and working capital requirements confirmed Khazanah. The Securities are listed on Bursa Malaysia Securities Berhad (under an Exempt Regime), Labuan International Financial Exchange Inc. (LFX) and the Singapore Exchange Securities Trading Limited (SGX-ST).

This latest dual tranche debt securities transaction follows the assignment to Khazanah of its inaugural issuer credit rating of A3 and A- from Moody’s Investors Service and S&P Global Ratings respectively.

The investment grade credit rating, says the SWF, “affirms Khazanah’s strong ability to meet its financial commitments, track record of sound investment and funding policies and important role in growing Malaysia’s long-term wealth.”

Since 2004, Khazanah has been a regular issuer in the global capital markets and supported Malaysia’s aspiration to be the leading hub for Islamic finance through landmark transactions including the world’s first exchangeable Sukuk and the country’s first Sustainable and Responsible Investment (SRI) Sukuk linked to education inclusion. As Khazanah does not receive regular capital infusions, it relies on its ability to generate returns and tapping capital markets to fund its investments.

Khazanah has historically enjoyed access to the capital markets, even successfully pricing an unrated Sukuk during the peak of the Covid-19 pandemic. “The strong investor demand despite a market downtrend reflects confidence in Khazanah’s credit and its ability to deliver its mandate as Malaysia’s sovereign wealth fund. The international credit rating will further enhance Khazanah’s attractiveness as an issuer and expand its global investor base,” maintained Dato’ Amirul Feisal Wan Zahir.

Based on Moody’s and S&P’s analysis, Khazanah’s A3/A- rating is supported by its strong linkage to the Government of Malaysia, Khazanah’s stakes in strategic Malaysian assets across key sectors, and its role in supporting and implementing the government’s socioeconomic objectives. Moody’s additionally noted Khazanah’s ability to tap external funding, its track record of conservative financial practices and policies, and commitment to operate within publicly articulated target leverage levels.

Khazanah’s standalone credit strength however is somewhat moderated by the high geographic concentration of its portfolio in Malaysia and exposure to market volatility which causes fluctuations in its portfolio value, as with many other sovereign wealth funds globally. Khazanah says it is continuing the process of rebalancing its portfolio to diversify its investments and reduce concentration risks.

Khazanah earlier this year recorded net profit from operations of RM1.6 billion (US$350.00 million) in FY2022, mainly contributed from monetisation activities and lower impairment in the portfolio. This despite the fact that 2022 was a challenging year for Khazanah and the global markets, with rising inflationary pressure, aggressive monetary tightening and energy crisis due to the Russia-Ukraine conflict.

Khazanah declared a dividend of RM500m (US$108.30 million) or 2022 to the Government of Malaysia, with cumulative dividends declared since 2004 amounting to RM17.1 billion (US$3.70 billion).

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