CIMB has formally opened its Australia operations this week, after the Malaysian bank acquired much of RBS’ Asian operations in April. The news that has overshadowed its opening is a comment in local press made by head of capital markets for Australia, Michael Forde, that the bank is keen to carry out an Islamic finance transaction as soon as possible.
This would mean taking an Australian issuer to the Malaysian sukuk market, as Australia does not have the necessary tax legislation in place for a domestic deal. But despite CIMB’s Islamic financial know-how, the bank will likely struggle to generate any real enthusiasm among Australian corporates for issuing sukuk in Australia, at least in the near term.
Islamic bonds have been much discussed in Asia as a diversification tool, but have failed to take off in many countries outside Malaysia due to complex documentation and legislative processes that often outweigh the pricing benefits to non-Islamic issuers.
Unlike countries such as Indonesia, India and Pakistan, with genuinely sizable Muslim populations, there is no religious incentive among a majority of Australians to issue the debt. And if these countries have struggled to get their sukuk markets off the ground, Australia’s chances don’t look too promising.
In addition, there is a lot of educating to be done. Two of the country’s biggest lenders refused to comment on the possibility of an Australian sukuk deal, saying they knew nothing about Islamic finance. An Australia-based fixed income analyst at a global bank admitted he had never heard of sukuk.
The buy-side has been equally shut off from Islamic finance. Next year, following the merger between the country’s only Islamic fund manager, Crescent Islamic and the Bank of London and the Middle East (BLME), the Crescent Islamic Cash Management Fund will be allowed to allocate up to 50% of its assets to investment grade Islamic bonds. However, as it stands, no Australian domiciled funds are able to invest in sukuk.
Only 2.25% of the population in Australia is Muslim, according to the government’s 2011 census. As such, for most of the nation’s treasurers, the motive to issue an Islamic bond would have to be economic. This is where the primary problem lies.
Funding foils
Unlike the country’s banks, Australian corporations are notoriously insular when it comes to tapping alternative markets. Even the dim sum bond market, which has attracted issuers from across the globe, has been left untouched by Australian companies. As such, the precedent suggests that they will steer clear of issuing ringgit sukuk unless the pricing looks particularly favourable.
According to Malaysian DCM bankers, this is unlikely. Australian corporates, on the whole, carry higher ratings than their Malaysian counterparts, a fact that syndicate bankers in Malaysia see as a deterrent. Domestic investors tend to be as much driven by name familiarity as they are by ratings.
As a rule of thumb they said that an issuer with a higher rating than the Malaysian sovereign (rated ‘A’ by Standard & Poor’s and Fitch, and ‘A3’ by Moody’s) will find it hard to find value in the ringgit market.
This means that while an Australian name could likely issue a bond, it may well not make sense in terms of pricing compared to what it could achieve in its own domestic market.
One incentive that could spur Australian lenders to issue sukuk in Malaysia regardless of the pricing would be the desire to expand their investment banking business into Asia. This could see one of the country’s big four banks (such as ANZ) bookrunning on its own Islamic ringgit bond deal.
However, this was perhaps not what CIMB’s Forde had in mind when he told local press he wanted to carry out an Islamic transaction.
Home market
An Australian ringgit sukuk transaction in the next 12 months is by no means an impossibility, but considering that CIMB is a newcomer to the Australian market it might do better to focus on building up its domestic presence.
Australia’s corporate bond market has traditionally been relatively subdued compared to developed market equivalents, but this year has marked the beginning of its opening up.
In July, a platform launched to allow retail investors to trade in Commonwealth Government Securities (CGS), bought the retail and institutional markets together for the first time in a move which commentators believed could considerably enhance the Australian corporate bond market.
In addition, the sovereign has been looking to develop a deeper bond market by extending the benchmark curve. All of these efforts seem to be working. Two of Australia’s largest companies, Coca-Cola Amatil and Telstra have both announced plans this week to issue local currency denominated bonds.
Coca-Cola wants to raise at least AUD100 million (US$104.3 million) worth of seven-year bonds, and Telstra is aiming higher, at around AUD500 million worth of five-year notes, according to the Wall Street Journal in Australia.
Fund managers are confident that the demand for these deals will be high, and that this could be the push needed to encourage more local banks and corporates to issue in Australian dollars.
If this is indeed the case, CIMB might do well do jump on the bandwagon and start courting some of the companies that are looking to take advantage of the situation at home, rather than focusing its efforts on trying to accomplish a unique and demanding task overseas.