ROLE OF ISLAMIC FINANCE IN INFRASTRUCTURE FINANCING

ROLE OF ISLAMIC FINANCE IN
INFRASTRUCTURE FINANCING
Financing Sources for Public-Private Partnerships (PPP)
Sub-Regional Expert Group Meeting (EGM) for South-East Asian
Countries
Nik Mohamed Din Nik Musa
Bank Negara Malaysia
Kuala Lumpur
24 November 2015
GLOBAL INFRASTRUCTURE LANDSCAPE
• The World Bank estimated
total global value of
infrastructure investments at
USD17 trillion (2013).
• North America required the
highest investment with market
size of 32%, followed by Asia
Pacific (29%)
• By sector, water made up the
largest contributor for
infrastructure expenditure
Source: US Bureau of Economic Analysis, Rreef Research, Ibid, World Bank, KFHR
1200
OECD Estimated Average Annual World Infrastructure Expenditure based on sectors, 2000-2030
USD Billion
1000
800
600
400
200
0
Road
Source: OECD; KFHR
Rail
2000-2010
Telecoms
2010-2020
Electricity
2020-2030
Water
2
INFRASTRUCTURE OPPORTUNITIES - FOCUSING ON ASEAN
ASEAN infrastructure needs at USD7 trillion between 2015 to 2030
3
INFRASTRUCTURE SUKUK
Sukuk has played a pivotal role in infrastructure financing for public and private projects.
Infra Sukuk Issued by Domicile of Issuer
(2012 - 3Q2015)
Malaysia, 61%
UAE, 7%
Indonesia, 1%
Pakistan,
1%
Saudi Arabia,
30%
Source: ISRA
Others, 0.2%
% of Infra Sukuk Issuances (2009 2011)
• USD73.1 billion infrastructure sukuk have been
issued by more than 10 different countries
between 2002 and 3Q2015.
• Infrastructure sukuk market dominated by
issuances from Malaysia (61%), followed by
Saudi Arabia (30%) and the UAE (7%).
• Malaysia’s Economic Transformation Programme
(ETP) will accelerate spending plans to meet its
economic and socio-economic targets by 2020.
• GCC infrastructure and real estate projects are
forecasted to reach almost USD2 trillion by 2020.
% of Infra Sukuk Issuance (2012 - 3Q2015)
Infra sukuk
USD73.12 bil
Infra sukuk
USD 20.80
bil
13%
17%
Total Sukuk
Issuances
2012 - 3Q2015:
USD420bil
4
INFRASTRUCTURE SUKUK - HIGHWAY
• Long-tenured government guaranteed
sukuk.
• Generated very robust interest taking into
consideration the large size of the issuance.
• First single largest bond issuance in
Malaysia.
• First single largest Ringgit-denominated
Sukuk issuance.
• First single largest sukuk issuance globally,
in any currency.
5
INFRASTRUCTURE SUKUK – MASS RAPID TRANSIT
• First ever sukuk in the world and fixed
income asset listed on Bursa Malaysia
for retail investors.
• Net proceeds: to finance the capital
expenditure and operating expenses for
the MRT project.
• The debut issuance of the ETBS
(Exchange Traded Bond and Sukuk) was
oversubscribed by 1.61 times (1,424
applications representing MYR484
million in value).
• Modes of public to purchase: via
application forms or ATM (Automated
Teller Machine) of participating banks.
• The landmark transaction is part of the
initiatives under the Capital Market
Masterplan 2 to facilitate greater retail
participation in the bond and sukuk
market and intend to make available
wider range of investment products to
retail segment.
6
INNOVATIVE INFRASTRUCTURE SUKUK - AIRPORT
World’s first rated hybrid perpetual sukuk
• Largest perpetual sukuk issuance by a Malaysian
corporate with a size of RM1 billion.
• Quasi-equity funding solution.
• Over-subscription of about 5.5 times (RM5.5 billion
order book).
Awards received for breakthrough transaction:
• Malaysia Airports - operations,
management and maintenance of
airports. Airports under its operations
- 5 international gateways, 16
domestic airports, 18 short take-off
and landing ports .
•
The Best Local Currency Sukuk – The Asset Triple
A Islamic Finance Awards 2015
•
Best Corporate Hybrid Sukuk – The Asset Triple A
Islamic Finance Awards 2015
•
Maiden Euromoney Award for Innovation in Islamic
Finance 2015
•
Market Pioneer Award 2015 - RAM League Award
• Sukuk proceeds to finance airport
related working capital.
7
MALAYSIA’S LOCAL CURRENCY BOND/SUKUK MARKET
•
•
Malaysia has the
second largest size of
local currency bond
(LCY) market in % of
GDP (ex-Japan).
This reduce
dependency on direct
banks financing
Source: Asian Bond Online
8
MYR BOND/SUKUK PRIMARY MARKET
Preference over sukuk for issuances by private sectors
Total amount issued for 1-yr
period (Jul 2014 – Jun 2015):
MYR 366.65b (USD 89.21b)
Debt Securities Issuances in Malaysia
51%
MYR Bio
Islamic
125.20
•
Dominated by
Government issuances
(public): 70%
•
51% are sukuk (public &
private)
•
Out of 30% private debt
securities (PDS): 56%
are sukuk
60.67
PDS, 30%
Conventional
132.69
48.08
Governme
nt, 70%
0
50
100
Government
150
200
PDS
MYR Bio
PDS monthly issuance shows preference over Sukuk
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Conventional
Islamic
Jul-14
Jul-14
4.95
Aug-14
Aug-14
3.37
Sep-14
Sep-14
7.02
Oct-14
Oct-14
3.00
Nov-14
Nov-14
4.18
Dec-14
Dec-14
4.70
Jan-15
Jan-15
2.45
Feb-15
Feb-15
2.13
Mar-15
Mar-15
5.46
Apr-15
Apr-15
3.37
May-15
May-15
4.55
Jun-15
Jun-15
2.91
6.57
4.03
6.15
3.28
5.63
7.73
1.80
1.13
5.19
7.98
6.95
4.24
1USD = MYR4.11
Source : BPAM
9
MYR BOND/SUKUK SECONDARY MARKET
Malaysia has a deep and liquid bond/sukuk market…
Oct 14 – Dec 14 marks the highest trading for past year
118.81
Q2 2015
109.90
174.19
Q1 2015
130.72
192.14
Q4 2014
0
50
• Active securities trading:
average monthly volume
traded = USD23.84b
133.69
163.02
Q3 2014
• Total amount traded for 1yr period (Jul 2014 - Jun
2015): MYR 1,175.63b
(USD 286.04b)
153.16
100
150
200
Conventional
250
300
350
• Sukuk are more actively
traded in the PDS market
MYR Bio
Islamic
PDS trading volume
7.82
7.10
5.48
6.28
5.76
5.31
5.13
4.67
4.21
3.66
3.52
2.50
2.03
2.37
7.20
6.41
2.54
3.26
3.26
2.20
1.96
2.47
2.39
1.01
Jul-14
Source : BPAM
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Conventional
Jan-15
Islamic
Feb-15
Mar-15
Apr-15
May-15
Jun-15
MYR Bio
10
MALAYSIA A LEADING SUKUK ORIGINATION MARKETPLACE
New Issuances by Country 1H 2015
• Malaysia remains the key driving jurisdiction in
the sukuk market, followed by Indonesia, the
UAE and Bahrain.
• Notably, Hong Kong issued its 2nd sovereign
sukuk in 1H 2015 following the successful
inaugural sovereign issuance in 2014.
• 1H2015 showed a total new issuances of
USD39.8 billion globally, the lowest half yearly
levels since 1H2011 (USD36.1bln), due to
weaker sentiment in financial markets, as well
as still-low oil prices.
Global Sukuk (Islamic Bond) New Issuances (2002 – 1H2015)
Malaysia’s
global sukuk
issuances
shares declined
slightly to 50%
in 1H2015 as
more new
issuances from
other
jurisdictions.
11
Source: Zawya
MALAYSIA AS A LEADING SUKUK ORIGINATION MARKETPLACE
Global Sukuk Outstanding 1H 2015
350
100%
90%
USD billion
300
80%
250
70%
60%
200
50%
150
40%
30%
100
20%
50
0
10%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1H15
Global Outstanding
9.63
16.21 27.58 51.59 94.72 104.81 123.16 142.31 177.85 229.31 269.42 300.90 312.97
Malaysia Outstanding
7.62
11.95 20.14 33.31 57.28 61.93 74.78 89.21 107.07 143.92 158.25 172.80 171.70
0%
Malaysia Market Share 79.2% 73.7% 73.0% 64.6% 60.5% 59.1% 60.7% 62.7% 60.2% 62.8% 58.7% 57.4% 54.9%
Malaysia’s share of global sukuk outstanding declined slightly to 54.9% in
1H2015 (1H2014: 57.4%), reflecting both lower issuances by Malaysia, as
well as higher issuances from other jurisdictions including Indonesia and
Hong Kong.
12
PLATFORM FOR MYR SUKUK BY FOREIGN & LOCAL ISSUERS
Foreign Issuers
GLCs & MNCs
IFC, World Bank, MYR500 mil (2004),
MYR760 mil (2005)
Shell MDS Sdn. Bhd, MYR125mil
(1990)
Islamic Development Bank, RM1 bil
MTN (2008)
AEON Credit Services, MYR400 mil
(2007)
National Bank of Abu Dhabi MRY1.5 bil
(2010, 2012)
Tesco Stores, MYR3.5 bil program
(2007)
Abu Dhabi National Energy Company
(TAQA) RM650 mil (2012)
Binariang GSM (Maxis Comm.)
MYR15.35 bil (2007)
Gulf Investment Corporation, RM1.675
bil (2011, 2012)
Toyota Capital Services, MYR1 bil
program (2008)
Sime Darby, MYR4.5 bil program
(2009)
Noble Group MYR900 mil (2012, 2013)
Celcom Axiata, MYR4.2b (2010)
Bahrain Mumtalakat Holding Company
MYR450 mil (2012, 2013)
PLUS, MYR30.6b program (2012)
Development Bank of Kazakhstan
RM240 mil (2012)
Danainfra, MYR1.5 bil (2013)
13
13
DEEP SUKUK MARKET LIQUIDITY CREATES ATTRACTIVE PRICING
Sukuk vs Bonds: Yield Comparisons showing Price
Advantage for Sukuk
3-yr Sukuk yield matrix
Q2
14
Q3
14
Q4
14
Q1
15
14/8
15
GII
3.59
3.64
3.74
3.43
3.75
AAA
4.08
4.04
4.12
4.06
4.12
AA
4.24
4.20
4.28
4.22
4.27
A
5.50
5.45
5.51
5.46
5.39
IRS
3.84
3.83
3.89
3.65
Why the need to consider Islamic
finance?
•
An alternative source of financing,
diversification of risk and portfolio, and
new asset class.
•
Sukuk as a competitive and viable fund
raising tool to finance working capital
and other financial needs.
•
Tapping into new and wider investor
base for sukuk vs bonds, creating higher
demand, thus better pricing for issuers.
•
Transparent and well-established price
discovery mechanism, creating a deep
and vibrant secondary trading market.
•
Malaysia’s sukuk market has world-class
infrastructure for data and valuation
which meets global standards for
Financial Reporting and Risk
Management.
3.72
3-yr Bond yield matrix
Q2
14
Q3
14
Q4
14
Q1
15
14/8
15
MGS
3.55
3.51
3.70
3.37
3.68
AAA
4.13
4.09
4.18
4.12
4.19
AA
4.29
4.25
4.34
4.28
4.34
A
5.55
5.50
5.57
5.52
5.46
IRS
3.84
3.83
3.89
3.65
3.72
Source : BPAM
14
SUKUK FOR INFRASTRUCTURE FINANCING
These massive global infrastructure requirements create financing opportunities for
Islamic finance
Gaining prominence as an
alternative source of funding
for large scale & long-term
infrastructure projects
Tapping wider
investor base Islamic and
conventional
investors
Competitive pricing
vis-à-vis bond – strong
demand creates better
pricing
WHY
SUKUK?
Promote good
business practice avoid interest,
uncertainties, overleveraging and
speculation,
backed by real
economic activities
Greater governance
and transparency that
promotes ethical and
fairness
15
SUKUK VS CONVENTIONAL
Key differences between sukuk and conventional bond are:
16
COMMON SUKUK STRUCTURE - IJARAH
1Malaysia Sukuk Global USD1.25 billion sukuk Ijarah
17
MALAYSIA IS A MULTICURRENCY SUKUK ISSUANCE PLATFORM
18
ATTRACT STRONG DEMAND FROM GLOBAL INVESTORS
19
VALUE PROPOSITIONS FOR SUKUK:THE CASE OF MALAYSIA
20
INDICATIVE EXPENSES ON ISSUANCE COSTS - SUKUK VS BOND
Amounts to be Raised
Upfront Fees
USD 1,000,000,000
Approximate Range
Item
Arranger Fees
Sukuk (USD)
500,000
500,000
60,000
60,000
For Arranger
60,000
60,000
For Issuer
300,000
300,000
For Arranger
320,000
320,000
International Legal Counsel
Regulatory Fees
6,000
6,000
Subject to issuance
International Rating Agency Fees
570,000
Shariah Advisory Fee
15,000
-
Trustee / Paying Agent /
Registrar/Transfer Agent/Delegate
10,000
10,000
Reporting Accountant Fee
150,000
150,000
Commodity Trading Fees
20,000
-
Processing and Listing Fee
25,000
25,000
Agent Fee
20,000
Roadshow Expenses
Misc. i.e. Printing, Advertising, etc.
570,000
Arranger Fees
Approximate Range
Sukuk (MYR) Bond (MYR)
500,000
500,000
For Issuer
200,000
200,000
For Arranger
200,000
200,000
Securities Commission
51,000
51,000
BNM Depository Fees
20,000
20,000
BNM FAST Charges
1,200
1,200
Regulatory Fees
Lead Manager / Bookrunner
Fee
Subject to issuance
Shariah Advisory Fee
100,000
-
Trustee / Paying Agent /
Registrar
10,000
10,000
Facility Agent Fee
50,000
50,000
Rating Fee
500,000
500,000
Reporting Accountant Fee
200,000
200,000
Commodity Trading Fees
20,000
-
20,000
Misc. i.e. Printing,
Advertising, etc
50,000
50,000
75,000
75,000
Total (MYR)
1,902,200
1,782,200
50,000
50,000
Listing Fees
Total (USD)
Item
MYR 1,000,000,000
Legal Counsel
For Issuer
Lead Manager / Bookrunner Fee
Upfront Fees
Bond (USD)
Domestic Legal Counsel
Securities Commission
Amounts to be Raised
2,181,000
2,146,000
21
EFFICIENT LODGE & LAUNCH PROCESS: MYR TRANSACTION
22
EFFICIENT LODGE & LAUNCH PROCESS: USD TRANSACTION
23
ISLAMIC FINANCE GAINING PROMINENCE FROM WESTERN COUNTRIES
Increasing number of traditional non-Muslim jurisdictions are tapping market opportunities in
Islamic finance, particularly sukuk
(Germany) The State of Saxony
Anhalt issued debut
sukuk in 2004
(U.K)
(Ireland)
1st sovereign
GBP sukuk
(Liechtenstein)
Gov’t plans to develop
Islamic wealth
management industry
(Japan)
UCITs funds
platform
(Mexico) Gov’t plans to issue
(Luxembourg)
1st Latin American
• 1st sovereign EUR
sukuk
sukuk
• UCITs funds platform
(South Africa)
1st sovereign
USD sukuk
• J-sukuk framework
extension until 2016
• 1st JPY sukuk by
BTMU
(Hong Kong)
• 2 sovereign USD
sukuk
• Gov’t published
tax guidance on
Islamic financing
Gov’t plans to examine
(Australia) tax law to ensure parity
between Islamic and
conventional financial
products
24
THANK YOU
Financing Sources for Public-Private Partnerships (PPP)
Sub-Regional Expert Group Meeting (EGM) for South-East Asian
Countries
Nik Mohamed Din Nik Musa
[email protected]
Bank Negara Malaysia
Kuala Lumpur
24 November 2015