MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Learning from Successful Malaysian
Islamic Issuers

In answering a question posed by moderator Abdulkader Thomas regarding what it takes to sell Islamic bonds, Rasheed Khan, speaking from his Shell experience, said the trick was to convince those involved that there were benefits to be gained from such a product. Raheed said Shell Malaysia put serious effort into studying Islamic finance, and it took the company almost nine months to make the decision, the longest so far in Shell history.

Commending Shell MDS on this product, Mashitah Hj Othman considered that it was an excellent achievement, given that the structure was so new and so there was no legal framework or precedents for such an exercise. She stressed that innovation worked very well in Malaysia due to the pioneering spirits in the country, which were backed by dedicated issuers. “As time goes by, most of the frameworks now are fine-tuned,” she noted.

Mashitah also divided issuers into three main categories, namely fully prepared, prepared but having completed no detailed homework and lastly, the totally unprepared. She explained that the fully prepared were those who understood the whole structure and also had familiarized themselves with the relevant rating exercises. The second category encompassed those who had shown their commitment in understanding the structure but had yet to start gathering data and information. As for the third category, they were totally unprepared in every aspect of the issue.

Having identified these different categories, she advised issuers to prepare themselves using technology, as information was easily accessible through the internet, for instance. The issuers, she added, should have the mentality of AAA-rated issuers, although there were more being downgraded than upgraded lately.

Mashitah revealed that from October 2005 until August 2006, there were only 17 ratings being upgraded compared to 24 downgraded; 18 were given a negative outlook and 13 had been put on watchlist. She reminded those present that bonds or commercial papers (CP) were not only for a year, but very much on a long-term basis, thus having the right attitude was paramount.

Rasheed stressed that the issuers should always have an open book policy where they should be transparent to the arranger, treating the arranger as a business partner and thus should not hide any facts or figures that could affect
the arrangement.
On issuance by international parties, Rasheed said that local legal firms were just as capable as those from overseas, although it all depended on the clients’ comfort. If the issue was to be issued in Malaysia, he did not see any problem with collaborating with local firms as they would be more familiar with the local environment.

Playing its part as the investment arm of the Malaysian government, Azman Mokhtar said Khazanah Nasional would always play a significant role in developing the local as well as the international Islamic finance industry, referring to its US$2.37 billion (RM8.7 billion) Khazanah benchmark bond that used the Murabahah structure. He also highlighted the US$870 million (RM3.2 billion) Rantau Abang Capital CP/medium-term notes using Sukuk Musharakah, which was fully GCC compliant.

Azman pointed out that Khazanah played the roles of both issuer and investor. As issuer, he said, the investment arm would play very much a developmental role, where all pricing would be competitive. As investor, on the other hand, he noted that Khazanah had the CIMB Group as its flagship bank, while also holding majority stakes in RHB Islamic Bank and Bank Muamalat Malaysia. Internationally, Khazanah had also supported the Pakistan Sovereign Sukuk.

Azman reiterated that Khazanah, as well as the other companies under Khazanah, would try to be at the forefront in terms of pricing, structure compliance and, more importantly, the reasons for using the Islamic finance instruments, namely to push for a fair and just monetary system.

A question was raised by Vassehar Abdul Razack of RHB Islamic on the documentation in Islamic finance transactions. He was very much concerned that some of the documentation was still based on conventional convenants, supposedly to protect the interests of all parties.

In responding to Vaseehar’s concern, Rasheed did not deny that traditionally, Islamic finance transactions used similar documents to those used in conventional transactions, however he said of late more and more firms were producing dedicated documents for Islamic finance transactions.

Adding to this, Mashitah said that it had to be agreed that most of the players were conventionally trained but most of them were moving towards reflecting a true Islamic transaction. However that could never happen overnight.