As Kuveyt Turk Participation Bank (KTPB), which is majority owned by Kuwait Finance House (KFH), one of the largest Islamic banks in the world, ponders the successful closure last week of its $350 million 5-year Sukuk Al-Ijara, its second issuance to date, there is already talk of future forays into the global financial market to raise even longer term funding subject to the usual caveats of timing and market conditions. (source)
Ufuk Uyan, the seasoned chief executive officer of Kuveyt Turk Participation Bank, in which KFH has a 62 percent equity stake and the Islamic Development Bank a 9 percent equity stake, confirmed to Arab News that “we at Kuveyt Turk are very happy to conclude the second sukuk transaction of Turkey with success and pave the way for future issuances. I do believe sukuk is a unique product whereby Islamic banks/participation banks can create an internally regenerating asset and then create a securitization and sell it on and so on. We would like to continue issuances in USD or TL as long as we build the necessary assets and continue to tap the capital markets.”
The issuance notched up several firsts for the Turkish sukuk market.
“Our issuance,” explained Uyan, “is the first sukuk to be realized under the provisions of the new Capital Markets Board (CMB) legislation on Lease (Ijara) Certificates, which is the Turkish Participation banking version of sukuk issuance, and for which also the taxation aspects of asset based securities or sukuk were equalized to bring them to a level playing field to that of conventional bond issuances.”
This was also the first Turkish sukuk with a 5-year tenor and the first one to start its road show in Asia — in Kuala Lumpur, Malaysia to be precise, before moving on to Singapore, Abu Dhabi and Dubai. Not surprisingly, Asian investors accounted for some 19 percent of the allocation.
This sukuk issuance should be seen in the context of the growing demand for and attractiveness of Turkish risk to Islamic and international investors and the burgeoning cooperation between Turkey and Malaysia in recent months especially in Islamic finance.
Bank Negara Malaysia (BNM), the central bank, in fact hosted a business seminar in Istanbul, Turkey at the end of September 2011 as part of an Islamic Finance Road Show which was led by BNM Deputy Gov. Muhammad bin Ibrahim and which featured Mahathir Mohamed, the former Malaysian Prime Minister, who gave a special address on the future of Islamic finance and the potential for Turco-Malaysian cooperation in the space.
According to Ibrahim, Malaysia’s substantive advancement in Islamic finance could be the basis for greater business and investment ties to enhance economic relationship between Turkey and Malaysia. The potential opportunities in this respect are huge.
For example, large amounts of funds could be raised, via sukuk, for the purpose of financing large infrastructure projects.
The aim of the seminar, which was themed “Malaysia and Turkey: The New Silk Route in Islamic Finance — Strategies for Collaboration, Cooperation and Smart Partnership,” was to strengthen economic, business and Islamic financial linkages for the mutual benefits of both countries.
“Malaysia welcomes the Turkish financial and business community to use its comprehensive and tested infrastructure with its extensive investor network as a platform to raise funds such as sukuk and Islamic syndication financing. The multi-currency sukuk market in Malaysia is well developed and active with over 60 percent of the outstanding sukuk in the world originating from Malaysia,” emphasized Ibrahim.
Collaboration in issuance of sukuk, he added, would benefit Turkey, as the country’s aggressive diversification of its industrial base and services sectors will require huge financing needs that could be partially met through the Islamic financial markets. Indeed, projects such as the underground railway tunnel across the Bosphorus; new railway lines; bridges and highways may be funded through the issuance of sovereign sukuk as an alternative source of funding. Islamic finance could also play an important role in Turkey’s on-going privatization program.
The fact that the road show culminated with a closed door industry-regulators dialogue on “Enhancing Malaysian-Turkish Cooperation in Islamic Finance” underlined the determination of the two partners in pressing ahead with this new-found relationship.
The price guidance started with a 6 percent profit rate for the benchmark $350 million 5-year sukuk Al-Ijara, which was lead managed by HSBC, Standard Chartered Bank and Liquidity Management House, which is a subsidiary of Kuwait Finance House.
They were also joint bookrunners for the transaction.
A few days later the transaction was priced at par with a profit rate of 5.875 percent with a spread of 447.5 basis points over MS (Mid Swaps) after a book building exercise totaling $560 million with over 50 orders. The allocation was 69 percent to Middle East investors; 19 percent to Asian investors; and 12 percent to European investors, with banks accounting for 81 percent of the uptake; sovereign wealth funds and supranational agencies for 10 percent; and fund managers and insurance firms for 8 percent.
The good news for the Turkish sukuk market is that the pricing for the KTPB sukuk was tight and far more competitive than the pricing for equivalent bonds issued by Turkish conventional banks such as Akbank and Isbankasi which were priced 50 basis points and 20 basis points more respectively.
This suggests that the investors are comfortable not only with Turkish risk but also with the credit risk of KTPB, backed by it’s a+ rated parent, KFH, and the quality of the asset pool.
“The portfolio,” according to KTPB’s Ufuk Uyan, “is pooled as per the new CMB Lease Certificate Legislation and consists of 51 percent Ijara assets (real estate plus leasing assets, including our head office building etc) and the remaining Murabaha receivables.”
The sukuk certificates were issued by a special purpose company (SPV), KT Sukuk Varlik Kiralama A.S on behalf of KTPB, and use the proceeds to purchase from KTPB a portfolio of real estate Ijara (leasing) assets, non-real estate Ijara assets and Murabaha receivables. In accordance with the lease agreement (in relation to the real estate Ijara assets), Kuveyt Turk will lease-back the real estate Ijara assets and will pay rent to the issuer who will in turn pay the profit distribution to the certificate holders.
“The SPV,” explained Ufuk Uyan, “is established within Turkey and assets were transferred to this SPV after which they were leased back to KTPB. After our first issuance of three years and $100 million, this $350 million sukuk with a five-year tenor I believe really paves the way for the Turkish economy and entrepreneurs for investments, financing and a type of fund raising which is not going to lead or add to the current account deficit problems of Turkey.”
For KTPB, this is its second sukuk issuance. Last year the Bank issued a 3-year $100 million Wakala Sukuk in the GCC market.
International rating agency Fitch Ratings assigned a final rating of “BBB-” to the KTPB $350 million Sukuk Al-Ijara offering. The rating, said Fitch, is in line with Kuveyt Turk’s Long-term foreign currency Issuer Default Rating (IDR) of “BBB-.”
Kuveyt Turk, said Fitch, is ultimately liable for the due and punctual payment of all sums payable to the certificate holders. In accordance with the purchase undertaking agreement, Kuveyt Turk undertakes to purchase the portfolio assets from the issuer against the exercise price at maturity, expected to be in 2016, or earlier if a dissolution event (which includes an event of default or breach of other obligations on the sukuk by Kuveyt Turk) occurs.
Kuveyt Turk’s payment obligations under this transaction will rank at least equally with the claims of all of its other unsecured and unsubordinated creditors.
Other Turkish issuers have been watching the developments and market dynamics especially the price guidance and investor uptake of the FTPB sukuk.
Albaraka Turk Participation Bank (ABTPB) and Bank Asya have both confirmed that they are also working toward issuing sukuk in the international market to raise longer term financing to finance their balance sheet activities.
An ABTPB source said that the issuance could be in the region of $300 million possibly before the end of the year.
Bank Asya on the other hand has mandated UBS and Citibank to arrange a five-year US dollar denominated sukuk - also in the region of $300 million.
Both issuances will be subject to market conditions. With the Greek sovereign debt crisis still festering, the geographic proximity of Greece to Turkey could unintentionally impact negatively on any imminent Turkish bond or sukuk issuance.
The major future development for the Turkish sukuk market, however, remains that elusive debut international sovereign Sukuk, which Turkey has been feigning to do for the last three years.
With Turkish risk on the back of buoyant GDP growth forecasts in excess of 6 percent for 2011 very appealing to international investors, the Debt Management Office at the Turkish Treasury in Ankara is fast running out of excuses for not going to the wholesale US dollar market to issue the country’s first benchmark sukuk offering.
Source : http://arabnews.com/economy/islamicfinance/article530383.ece - Nov 6, 2011
