This article first appeared in The Edge Malaysia Weekly on December 25, 2023 - December 31, 2023

Despite rising Malaysian Government Securities (MGS) rates and a volatile market environment, AmInvestment Bank Bhd has successfully closed the order book on SMJ Sdn Bhd’s Islamic bond, or sukuk, at RM3.5 billion, representing a bid-to-cover ratio of 3.9 times.

The RM900 million issuance, which was based on the shariah principle of wakalah and launched in October, consisted of four tranches with a tenor of between five and 15 years and carried a profit rate of between 4.23% and 4.67% per year. The issuance saw keen participation from 24 institutional investors, indicating strong interest and confidence.

The maiden issuance came under SMJ’s multi-currency sukuk issuance programme with an aggregate nominal value of RM10 billion.

Rated AAA by local rating agency RAM Rating Services Bhd, the sukuk was accorded the highest rating in recognition of SMJ’s low risk and balanced portfolio of upstream production sharing contracts and midstream liquefied natural gas (LNG) plant and petrochemical plant, says AmInvestment Bank.

It adds that the sukuk holders benefit from the issuance as its price was 20 basis points (bps) lower than its initial price guidance of MGS plus 60bps to 70bps to the final price of MGS plus 50bps across all tenures.

The 15-year sukuk was priced at MGS plus 50bps, which is below similarly AAA-rated Pengurusan Air Selangor Sdn Bhd’s recent 15-year sukuk at MGS plus 58bps.

Despite the tight pricing, AmInvestment Bank says investors are in the money on a secondary mark-to-market basis with its price of between RM100.674 and RM102.355 per RM100 par as at Nov 22, 2023.

The proceeds will be used to refinance the existing borrowings of Sabah International Petroleum Sdn Bhd (SIP), which holds a 10% ownership stake in Petronas LNG9 Sdn Bhd, which operates an LNG plant in the Bintulu LNG Complex in Sarawak.

“These cash flows enable the [Sabah] state government to diversify its funding sources, optimise the capital structure and support our growth strategy where SMJ will continue to acquire profitable and producing oil and gas (O&G) assets,” said Sabah Finance Minister and SMJ chairman Datuk Seri Masidi Manjun in a statement in October when the issuance was closed.

Noting that there are a lot more untapped O&G resources in Sabah, Masidi said the Sabah government, with SMJ’s help, will achieve greater revenue sharing, greater say and greater participation in the O&G development in the state.

According to AmInvestment Bank, the sukuk holders are assured of an accretive and secured investment as SMJ has indirect access to Petroliam Nasional Bhd’s (Petronas) O&G portfolio in Sabah, which has large commercial resources of 1,630 million barrels of oil equivalent (mmboe) and technical resources of 2,108 mmboe. Sabah produces 41% of Malaysia’s total oil and condensate and 18% of natural gas.

SMJ is an O&G company that is wholly-owned by the Chief Minister Inc of Sabah. In December 2021, the Sabah government and Petronas signed a commercial collaboration agreement that gives the state the rights to acquire producing assets, as part of plans to obtain a greater share of O&G revenue. In 2022, Sabah’s revenue grew to a record RM6.96 billion with RM3.39 billion in tax revenue.

In April this year, SMJ completed the acquisition of 25% equity interest in Petronas Chemicals Fertiliser Sabah Sdn Bhd 

(PC FSSB) for RM1.2 billion. PC FSSB operates an integrated ammonia and urea production complex in the Sipitang Oil and Gas Industrial Park in Sabah.

AmInvestment Bank acted as corporate and rating adviser, principal adviser and lead arranger for the inaugural sukuk issuance. It was also one of the lead managers, along with CIMB Investment Bank Bhd and Bank Pembangunan Malaysia Bhd.

Notable mention

The words “receivables” and “buy now, pay later” (BNPL) may be a turn-off among the conservative. Yet, the stellar AA2-rating assigned to SEA Group’s maiden RM320 million BNPL receivables-backed medium-term notes (MTN) under Poseidon ABS Bhd indicates that safeguards put into the structure against portfolio stress succeeded in getting buy-in from — according to its adviser — “a mix of institutional investors”, while delivering “an attractive financing instrument to the originator for efficient capital recycling”.

Sole principal adviser Maybank Investment Bank says SEA Group’s foray into the ringgit asset-backed MTN, dubbed the first of its kind, brings a novel asset class to the Asean rated fixed income market, adding variety and diversity to the market’s debt offering — earning it a notable mention from The Edge.

The structure basically securitises consumer credit BNPL receivables from the NYSE-listed SEA Ltd’s Shopee e-commerce platform, where SeaMoney Capital Malaysia Sdn Bhd (originator, which offers SPayLater BNPL financing on Shopee) will from time to time sell eligible SPayLater receivables to the issuer (Poseidon). Concurrently, the issuer issues a combination of Class A Senior MTN and Class B Junior MTN or redeemable preference shares, from which proceeds are used to buy those receivables.

The initial tranche comprises up to RM218 million 3-year Class A Senior MTN at a coupon of 5.3% per annum and a RM100.9 million junior MTN with a variable coupon, which is taken up by an entity within the SEA Group and is subordinated to the Senior MTN in terms of payment priority and claims.

According to RAM Ratings, the Senior MTN is supported by the initial overcollateralisation (OC) rate of 37.61%, which provides adequate credit support that is commensurate with a AA2 rating.

The coupon payment to the Junior MTN is conditional upon meeting a post-payment minimum OC rate of 45% and reserve account balance requirements, and is prohibited “during the rapid and controlled amortisation period” (where no further receivables can be purchased) until all senior MTNs are fully redeemed. The structure also includes a backup servicer to further moderate risks of default. With enough interest in niche market instruments, the maiden issuance will likely not be its last given that the facility is up to RM3.5 billion.

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