Khazanah Debuts Ethical Islamic Bonds With Annual Sales Planned

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Khazanah CFO Mohd Izani Ghani
Mohd Izani Ghani, chief financial officer of Khazanah Nasional Bhd. Photographer: Goh Seng Chong/Bloomberg

Malaysia’s state-owned sovereign wealth fund is about to test appetite for the nation’s first socially responsible Islamic bonds and plans to issue such debt annually.

Khazanah Nasional Bhd. will start marketing as much as 150 million ringgit ($42 million) of the seven-year sukuk on Monday, Chief Financial Officer Mohd Izani Ghani said in a May 14 interview in Kuala Lumpur. The offering will fund 20 schools in Malaysia, he said, adding that future sale options may include healthcare and affordable housing.

The world’s biggest Shariah-compliant debt market is setting a precedent for Socially Responsible Investment sukuk after pioneering Islamic finance 30 years ago. While it’s an innovative concept that will appeal to some funds, it might be a challenge to sell such products given they won’t fall into many investors’ mandates, according to Manulife Asset Management Services Bhd.

“Khazanah’s sukuk meets the social responsibility criteria as it provides funding for projects that will improve the well-being of the people,” said Mohd. Effendi Abdullah, Kuala Lumpur-based head of Islamic markets at AmInvestment Bank Bhd. “While it would be a challenge convincing investors to buy because the concept is new, the offering will be a catalyst for further issuance in an area that’s still nascent.”

Performance Based

The SRI sukuk will pay fixed, periodical profit rates throughout the bond’s term, with principal repayments linked to the individual school’s performance in terms of the quality of education provided, said Izani. Before maturity, the profit rate will be adjusted lower, he said.

The “step-down yield” could be 100 basis points below the coupon rate, Izani said. For those who may wish to put all their maturing cash back into the schools, Khazanah will buy back the debt at one ringgit and the investor will receive a tax allowance from the government, he said.

“This is a feel-good sukuk for investors who want to give back to society,” Izani said. “We acknowledge that it’s challenging to get fixed-income fund managers to accept a step-down yield but it’s for a good cause.”

Khazanah will sell the debt via its unit Ihsan Sukuk Bhd. at the end of this month and the coupon will be set at about 50 basis points above Malaysia Government Securities, Izani said.

Yields on the nation’s 2022 non-Islamic debt dropped 27 basis points, or 0.27 percentage point, to 3.79 percent this year, according to a central bank index. The rate on Khazanah’s existing similar-maturity sukuk fell 10 basis points to 4.23 percent over the same period.

Top Rated

The company hired CIMB Group Holdings Bhd. and Amanie Advisors to assist with the offering from its 1 billion ringgit ethical sukuk program that has been assigned a preliminary AAA credit by RAM Rating Services Bhd., the top investment grade. Khazanah has 110.8 billion ringgit in assets including stakes in Malaysian Airline System Bhd. and Tenaga Nasional Bhd., according to the fund’s Jan. 14 statement

Malaysia’s ethical initiatives introduced in August last year come under three groups encompassing green technology financing, socially responsible investment sukuk, and environmental, social and governance.

The World Bank took the lead in issuing such bonds in 2008 and has sold almost $8 billion of the debt on its own behalf through over 90 transactions in 18 currencies, according to its website. The lender helped the London-based International Financial Facility for Immunization sell $500 million of floating rate dollar-denominated ethical Islamic notes in November. The 2017 debt was scored as Aa1, the second-highest investment-grade, by Moody’s Investors Service.

Focused Objectives

Khazanah’s socially responsible sukuk has very focused objectives and may encourage other issuers to follow suit, said Elsie Tham, a senior fund manager at Kuala Lumpur-based Manulife Asset Management Services, which oversees more than $1 billion.

“With this sukuk, you know exactly where the funds are being channeled unlike outright donations,” said Tham, who won’t buy the notes because they aren’t aligned to her fund’s mandate. “The sukuk will probably be a success because it’s small in size and it’s the first of its kind.”

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