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Malaysia’s Cagamas Issues Debut Sustainability SRI Sukuk to Fund Purchase of Islamic Mortgages from the Market to Finance Affordable Housing

Cagamas Berhad, the National Mortgage Corporation of Malaysia, one of the most prolific issuers of Sukuk, continues to play a major role in Sukuk origination and in the Islamic mortgage securitization market in Malaysia with its latest two offerings in October 2020.

Cagamas also continues to be an innovator in the mortgage finance, securitisation and Sukuk origination market. Last month for instance, Cagamas, through its subsidiary Cagamas SRP Berhad, launched the Digital Skim Rumah Pertamaku (Digital SRP), the country’s first online home financing service aimed primarily at first time home buyers.

Digital SRP was launched in collaboration with Didian, a B2B property marketplace that connects property agencies with new launch properties from Malaysia’s top developers, and TRB Ventures Sdn Bhd (MHub), a proptech ecosystem focusing on solutions to speed up, simplify and save cost in property transactions.

In October, Cagamas achieved another first by successfully pricing a combined issuance of its inaugural ASEAN Sustainability SRI Sukuk and Islamic Medium-Term Notes (IMTNs) totalling RM450 million. In a second transaction in October Cagamas issued RM300 million Islamic Commercial Papers (ICPs), bring the total for the month to RM750 million.

The issuance, said the Corporation, comprised two tranches – a 3-year RM100 million SRI Sukuk and a 3-year RM350 million IMTNs based on the Islamic principle of Murabahah under the Company’s existing RM60 billion Islamic Medium-Term Notes (MTN) Programme, which issues Sukuk inter alia under the Islamic concepts of Bil Istithmar, Murabaha, Musharaka, Ijara, Wakala and Mudaraba respectively.

Malaysia pioneered SRI Sukuk following the introduction of an SRI Sukuk Regulatory Framework by the Securities Commission Malaysia in 2014. Khazanah Berhad, the sovereign wealth fund of Malaysia, issued the first two education-linked SRI Sukuk. Since then there have been a number of sporadic issuances bit not the anticipated wave of Sukuk.

However, with the rise of the sustainability debate linked to the UN’s Sustainable Development Goals (SDGs) Agenda, institutions have been pioneering the issuance of Sustainability Bonds and Sukuk, albeit it remains a nascent market.

The Islamic Development Bank (IsDB), for instance, issued its debut US$1.5 billion Sustainability Sukuk in June this year, which the IsDB stressed is also the first Sukuk specifically ring-fenced to mitigate the health and economic impact of the global coronavirus outbreak and the recovery from the pandemic.

The proceeds from the debut sustainability issuance, according to the IsDB, will be exclusively deployed towards social projects under the Bank’s Sustainable Finance Framework (SFF), with a focus on ‘access to essential services’ and ‘SME financing and employment generation’ categories under the umbrellas of the UN’s Sustainable Development Goal (SDG-3) relating to Good Health and Well-Being’ and ‘SDG-8 relating to Decent Work and Economic Growth’ for its 57 member countries, to assist them in tackling the aftermath of the COVID-19 pandemic.

The proceeds from Cagamas’s SRI Sukuk on the other hand will be used to fund specifically the purchase of eligible Islamic financing for affordable housing whilst the proceeds from the IMTNs will be used to fund Islamic house financing.

Datuk Chung Chee Leong, President/Chief Executive Officer of Cagamas stressed that the Corporation is “pleased with the overwhelming response to Cagamas’ issuance of the Company’s inaugural ASEAN Sustainability SRI Sukuk to fund Islamic financing related to affordable housing, subscribed by socially responsible investors and executed at a competitive rate.”

The issuance, conducted via a public book building exercise led solely by RHB Investment Bank, received an overwhelming response from investors and achieved a total order close to RM2 billion at initial price guidance. This enabled the Company to progressively improve the price guidance, leveraging on the demand momentum to close at a final price of 2.23% p.a. for the SRI Sukuk and 2.25% p.a. for the IMTNs to be paid semi-annually, with a combined final book-to-cover ratio of 3.3 times. The final prices for the issuance represent 39 and 41 basis points above the corresponding 3-year Malaysian Government Investment Issue.

Both issuances are priced at a fixed profit rate with the SRI Sukuk and the MTNIs maturing on 26 Oct 2023 and listed on the Bursa Malaysia.

“Cagamas is encouraged by the exceptionally strong level of support from investors as evidenced by the lower yield recorded on the SRI Sukuk compared to the IMTNs. We had participation from a diversified pool of investors, including a statutory body, sovereign wealth funds, pension funds, financial institutions, asset managers and insurance companies. We would like to thank the many stakeholders who have helped to make Cagamas’ maiden SRI Sukuk issuance so successful and would like to express our appreciation for the effort and contribution by the RHB Group in this collaboration,” added Datuk Chung.

The SRI Sukuk for affordable housing is assigned the highest Social Benefit rating of Tier-1 by RAM Sustainability Sdn Bhd under Cagamas’ Sustainability Bond/Sukuk Framework. The Framework comprises two social solutions namely affordable housing and employment generation via Small and Medium Enterprises; and five green solutions which include renewable energy, energy efficiency, green buildings, low-carbon transportation and sustainable water and wastewater management.

“The positive conclusion of this issuance is a strong testament of Cagamas’ commitment to support the development of industry-led sustainable product offerings such as affordable housing loans and financings. It is a meaningful milestone for Cagamas amidst current challenging market conditions,’’ maintained Datuk Chung.

In a second transaction in October Cagamas also issued combined conventional and Islamic million short-term papers totalling RM600. The issuance had two tranches comprising RM300 million 3-month Islamic Commercial Papers (ICPs) and RM300 million Conventional Commercial Papers (CCPs). Proceeds from the issuances will similarly be used to fund the purchase of house financings and housing loans from the financial system.

“We are pleased with the success of the issuances given the uncertainties in the market environment. Market players continue to gauge the economic impact due to the recent resurgence of COVID-19 cases and the subsequent Conditional Movement Control Order enforced in targeted areas within the country, coupled with renewed anticipation for further rate cuts at the coming Bank Negara Malaysia Monetary Policy Committee meeting next month,” explained Datuk Chung.

“Despite cautious market sentiments, the Company has successfully secured strong interest from the market for its short-term papers and priced its ICPs and CCPs issuances competitively at 22 bps and 32 bps respectively above the Malaysian Islamic Treasury Bills and Malaysian Treasury Bills,” added Datuk Chung.

The above transactions marked the Company’s fifteenth, sixteenth and seventeenth issuance exercise for the year and brings the year-to-date issuance amount to RM6.68 billion. The papers, which will be redeemed at their full nominal value upon maturity, are unsecured obligations of the Company, ranking pari passu among themselves and with all other existing unsecured obligations of the Company. They will be listed and tradable under the Scripless Securities Trading System of Bursa Malaysia.

Cagamas’ corporate bonds and Sukuk continue to be assigned the highest ratings of AAA and P1 by RAM Rating Services Berhad and AAA/AAAIS and MARC-1/MARC-1IS by Malaysian Rating Corporation Berhad, denoting its strong credit quality.  Cagamas is also well regarded internationally and has been assigned local and foreign currency long-term issuer ratings of A3 by Moody’s Investors Service Inc. that are in line with Malaysian sovereign ratings.

The Cagamas model is well regarded by the World Bank as the most successful secondary mortgage liquidity facility. Cagamas is the second largest issuer of debt instruments after the Government of Malaysia and the largest issuer of AAA corporate bonds and Sukuk in the market. Since incorporation in 1986, Cagamas has cumulatively issued circa RM317.6 billion worth of corporate bonds and Sukuk.

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