Sample - Islamic Finance News

Sample - Islamic Finance News

Islamic Finance news Guide 2007

Rafflesia Capital’s Exchangeable Trust Certificates


On the 27 th September 2006, UBS Investment

Bank successfully launched and priced what is

believed to be the world’s first Shariah compliant

exchangeable trust certificates. The Sukuk,

exchangeable into the equities of Telekom

Malaysia, were issued by Rafflesia Capital, a

Labuan (Malaysia) incorporated special purpose

company, for Khazanah Nasional, the investment

arm of the Government of Malaysia.

This was the largest ever exchangeable issue to come out

of Malaysia and the largest exchangeable issue out of Asia

– excluding Japan – in 2006. The offering comprised US$750

million of periodic payment trust certifi cates (due in 2011),

upsized from the initial deal size of US$500 million on the

back of strong investor demand. The offering was launched

with a yield range of 5-year US dollar swap -32.5 bps to

+42.5bps (equivalent to 4.925% to 5.675%) and a premium

of 17–20%, fi nally pricing at a tight 5.07% (swap +3 basis

points). The fi nal pricing was set at a yield of 5.07% and a

premium of 19%, which was above the mid-point of the

indicated range.

Unique structure

What was so remarkable about this transaction was its unique

and innovative structure – we believe this is the fi rst Sukuk

structure to be backed by Shariah compliant fi nancial assets

(equities of Telekom Malaysia). Previously, the Sukuk market

was predominantly comprised of Sukuk structured as trust

certifi cates, representing ownership of physical assets. This

meant that potential issuers with inadequate physical assets

– including holding companies and investment fi rms – were

excluded. This deal establishes a structural framework so that

these issuers can have access on the basis of their Shariah

compliant fi nancial assets.

Another challenging aspect of structuring this transaction

was designing the mechanism for payment of coupons on

the Sukuk, which were structured as premium redemption

instruments paying a coupon of 1.25%. Unlike the redemption

amount, which is guaranteed by Khazanah Nasional pursuant

to a Unilateral Purchase Undertaking, the periodic Sukuk

coupons could not be guaranteed and had to be paid from

the dividend income derived from the equities of Telekom

Malaysia. Investors’ concerns regarding the uncertainty of

coupon payments were addressed by creating a sinking fund

account for the benefi t of the investors, wherein dividends

from the underlying equities were accumulated to ensure the

availability of funds from which to make payment of periodic

coupons over the life of the transaction.

Commitment to Islamic finance

The motivation of Khazanah Nasional for this deal was to

reinforce Malaysia’s reputation as an international Islamic

banking hub; to continue Malaysia’s tradition of innovation

in Islamic banking; and to tap into Middle Eastern liquidity as

an alternative funding source. Therefore, a key performance

indicator for Khazanah Nasional was the acceptability of this

structure to both conventional and Islamic investors globally,

and distribution of the Sukuk to Middle Eastern fi nancial

institutions. Given Malaysia’s prominent commitment to

the development of Islamic fi nance, it was crucial that UBS

Investment Bank structured the transaction in a way that

was both Shariah compliant and priced at levels attractive to

Islamic and conventional investors.

Extensive pre-marketing

Being the fi rst Shariah compliant exchangeable Sukuk, UBS

Investment Bank, along with representatives of the other

joint lead managers, undertook an extensive pre-marketing

exercise wherein selected Middle Eastern fi nancial institutions

in Kuwait, Qatar, the UAE and Bahrain were educated on the

various aspects of the Sukuk and encouraged to return their

feedback on the product features.

“The issue generated demand

in excess of US$3.2 billion, with

over 100 investors participating,

implying a subscription level of 6.6

times the base deal size”

Great demand

The groundbreaking nature of the deal combined with the

investor education conducted during the pre-marketing

phase motivated Islamic investors to buy in at below their

benchmark investment yield levels. The issue generated

demand in excess of US$3.2 billion, with over 100 investors

participating, implying a subscription level of 6.6 times the

base deal size. UBS Investment Bank generated 57% of this

US$3.2 billion demand. Approximately 44% of the Middle

East allocation was made to clients of UBS Investment Bank.


Islamic Finance news Guide 2007

Rafflesia Capital’s Exchangeable Trust Certificates (continued...)

Shariah compliance of Telekom Malaysia

The Sukuk was structured as exchangeable trust certifi cates

representing the benefi cial ownership of the investors in the

underlying fi nancial assets (Telekom Malaysia equities). It was

therefore imperative from a Shariah compliance perspective

that Telekom Malaysia be Shariah compliant at the time of

issuance of the Sukuk and remain so throughout the tenure

of the Sukuk. For this purpose, the Shariah advisors of the

three joint lead managers approved the following criteria for

determining the Shariah compliance of the company:

demand, not only from Islamic and Middle Eastern investors,

but also from conventional investors. The Fed Funds rate was

widely forecast to remain constant, with the expectation that

this would result in tightening of the swap rates as a result of

improving sentiments. Over the period of the book building,

the US dollar swap rates tightened by around 25 basis points,

which was fully captured in the fi nal pricing to the benefi t of

the issuer.

Strong interest

There was very strong interest from all groups of investors

globally; the allocation by investor type is shown below.

Allocation by investor type



ME Conv.


Hedge Funds




Source: UBS Investment Bank, September 2006

A designated calculation agent periodically applies the

above-mentioned tests to the relevant fi nancial statement

of Telekom Malaysia and forwards the results to a group of

three Shariah scholars appointed by Raffl esia Capital, which

issued the Sukuk, on behalf of Khazanah Nasional. If there

is a sustained breach of the Shariah compliance tests, the

Shariah scholars have the discretion to declare Telekom

Malaysia non-Shariah compliant, which gives the investors the

right to have their respective Sukuk redeemed by Khazanah

Nasional at an agreed price.

Key timing

The timing of the transaction and its execution were key

factors to the success of the offering. Given the complexity

and objectives of the transaction, a detailed timetable was

prepared. Adequate time was factored in for investors to

understand the new structure and also assess the credit

quality of Khazanah. UBS Investment Bank conducted

continuous education and feedback sessions with Middle

Eastern investors to provide them with comfort. Investors had

a week to analyze the underlying asset and participate in the


The result of this careful planning was signifi cant interest and



Source: UBS Investment Bank, September 2006

Allocation was greatest among hedge funds, which were

allocated 33% of the offering; outright investment accounted

for 23% of allocation; and Islamic and conventional Middle

Eastern investors were each allocated approximately 14% of

the total issue size.

Highly successful

In the press the deal was unanimously perceived as a highly

successful offering. The Sukuk – and the UBS team in charge

of the transaction – gained a number of prestigious awards in

connection with the deal and it has also been nominated for

a number of other major awards to be announced during the

fi rst quarter of 2007.

UBS Islamic Finance Group is a

dedicated team of specialists focused

on the structuring and execution of

Shariah products, giving customers

access to innovative Shariah compliant investments and services

across a range of asset classes including commodities, equities,

fi xed income, foreign exchange and alternative investments.

For further information please contact the UBS Islamic Finance

Group on: Islamic-fi

You & Us

The global partnership

for Islamic finance

Our Islamic Finance Group, a dedicated team of specialists focused on the structuring and

execution of Sharia products, gives you access to innovative Sharia compliant investments

and services across a range of asset classes including commodities, equities, fixed income,

foreign exchange and alternative investments. UBS offers tailored investments and services

solutions compatible with Sharia values to wealth management, asset management,

institutional, corporate and government clients across the globe.

UBS offers you global scale and presence, market strength and liquidity, including direct

market access and 24-hour trading with award winning technology, e-trading and a global

clearing platform. You benefit from our expertise across all asset classes with market leading

research and client service, backed by our AA+ credit rating.

For further information please contact

© UBS 2007. All rights reserved.

More magazines by this user
Similar magazines