Country Garden sukuk issuance a blow to Hong Kong’s Islamic finance hopes

Developer to become first mainland corporate issuer of Islamic bonds

PUBLISHED : Sunday, 25 October, 2015, 2:36pm
UPDATED : Monday, 26 October, 2015, 5:08pm

Developer Country Garden is on track to become the first mainland corporate issuer of Islamic bonds, opting to issue them in Malaysia rather than in Hong Kong, where it is listed, despite many years of efforts by Hong Kong to establish itself as a regional Islamic finance hub.

No details of the plan to raise 1.5 billion Malaysian ringgit (HK$2.73 billion), based on the sharia principle of murabahah, have been revealed, including the coupon rate and tenor, since the proposal was announced on October 5 .

“As this is the inaugural issuance by a North Asia corporate, yields are expected to be higher against similarly rated peers as investors price in a liquidity premium,” said Ahmad Najib Bin Nazlan, head of Islamic finance at Maybank Asset Management.

Country Garden has appointed CIMB Investment Bank as the lead arranger and lead manager for the medium-term notes, to be offered to qualified investors, not the general public. They will not be listed on any securities exchanges.

The infrastructure to issue Islamic bonds is much more developed in Malaysia
Christian de Guzman, Moody’s

The company has said the proceeds will be used to finance current and future investment. It has three projects in Malaysia now.

The Country Garden Danga Bay project, its first outside China, raked in 7 billion yuan of contracted sales in 2013 and became the biggest contributor to sales that year. But the success was not repeated last year and the firm scaled back on overseas expansion this year.

Christian de Guzman, a vice-president and senior analyst at Moody’s, said the mainland developer’s preference for Kuala Lumpur rather than Hong Kong was an indication that local efforts to become an Islamic finance hub were not gaining traction.

Hong Kong has been eyeing Islamic finance since 2007, but has so far achieved little, apart from one bond issuance this year and one last year.

To compete against Kuala Lumpur, which dominates the global Islamic finance business, and Singapore, Hong Kong enacted new rules that equalised the tax treatment of Islamic debts and conventional bonds in 2013.

Islamic bonds, also called sukuk, are required by sharia law, which forbids interest, to be structured in such a way as to generate returns in the format of profits or rental income.

De Guzman said a lack of understanding about Islamic financial instruments was one reason why there was little demand for such products in Hong Kong.

“Institutional investors investing in sukuk will have to undergo further steps in terms of due diligence as Islamic financial instruments like sukuk are much more complex than conventional instruments,” he said.

“The infrastructure to issue Islamic bonds is much more developed in Malaysia, when you talk about the banks that have the capacity and experience to structure the bonds according to Islamic principles, and when you think about the accounting and legal firms in Kuala Lumpur that are very used to dealing with such issuances.”

Kuala Lumpur will host the 11th World Islamic Economic Forum early next month.

Maybank’s Najib Nazlan said governments needed both impetus and momentum to promote Islamic finance, through such initiatives as standardising sukuk structures, promoting price transparency, having regulations that facilitate investors’ involvement and harmonising tax treatment for conventional bonds and sukuk.

“Developing the sukuk market alone may not necessarily lead to a deep and liquid market without a comprehensive and supportive ecosystem,” he said, adding that more than 70 per cent of sukuk investors were banks, with the other 25 per cent taken up by central banks and sovereign wealth funds.

Ratings agency Standard & Poor’s said in a report this month that growth in global Islamic finance was likely to slacken to a single-digit rate next year, from between 10 per cent and 15 per cent over the past decade.

“The industry has achieved critical mass – Islamic finance assets worldwide exceed US$2 trillion by our estimate,” S&P’ global head of Islamic finance Mohamed Damak said.

“But we now think the industry faces challenges from the decline in oil prices, changes in the global regulatory framework for banks and insurance companies, and its own fragmented nature.”

On the upside, Islamic finance stakeholders’ efforts and the industry’s contribution to the development of the real economy were likely to spur growth, the report said, tipping the world’s Islamic finance to be worth US$3 trillion sometime in the next decade.