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Investors on the hook in first SRI sukuk from Malaysia

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Malaysia’s Khazanah Nasional has priced the first ringgit-denominated socially responsible investment (SRI) sukuk. The product was a strong test of investor commitment to SRI goals as it uses a structure that pays less if the underlying education project is successful, writes Christina Khouri.

The sovereign wealth fund raised MR100m ($27m) from a seven year sukuk via sole lead arranger CIMB and joint shariah advisors CIMB Islamic Bank and Amanie Advisors on June 2.

Proceeds from the sukuk will be used by Yayasan AMIR, a non-profit organisation supported by Khazanah, whose remit is to improve accessibility to quality education in government schools through its Trust Schools Programme, a public-private partnership with the Ministry of Education.

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Izani Ghani, executive director and CFO at Khazanah, said it used the sukuk to attract like-minded investors so that it could continue the project. The programme has 30 schools under its wings, and there are plans to expand that by another 20 this year.

Investors buying into the bond will need to be committed to the school project as the wakala sukuk uses a “pay for success structure” that will reduce returns if certain key performance indicators (KPIs) are met.

The bond was priced at par to yield 4.3% a year. In year five there will be a KPI review and if the targets are met, investors will face an 80bp reduction of yield to 3.5%.

If the KPIs are not met the yield will remain at 4.3% for the rest of the sukuk’s life. KPIs include student and teacher performance, explained Ghani.

The format is a shift away from typical social impact bonds that have tended to reward investors when the related project is successful.

“In the previous social impact bonds we've seen, the investors are promised a certain return based on the key performance indicators (KPI) met,” said Siew Suet Ming, head of structured finance ratings at RAM Ratings Service, a Malaysian ratings agency.

If investors are feeling particularly generous they can go a step further. “Another interesting feature we added to the sukuk is that at any time the investor can waive the principal, as a way of gifting the amount to the schools,” said Ghani.

Investors will also get a tax exemption from the government for selling their sukuk back to Khazanah.

Structure limitations

While the sentiment of the deal is admirable, bookbuilding showed the limitations of this type of structure. The bond received only around MR133m worth of orders from an investor pool that included foundations, pension funds, banks and corporates with corporate social responsibility (CSR) budgets for the instruments. 

“It’s not easy to convince people to accept lower yields,” admitted Ghani.

Khazanah also felt no need to offer a sweetener to investors by offering a premium to where it would normally price a seven deal ringgit bond.

“We priced this deal in comparison to previous seven year papers, also in the 4.3%-4.4% range,” said Ghani. “If we wanted to entice more we could have given a higher yield, but this is a Khazanah credit so we priced in line with our curve.”

However, as the programme and deal size are both small, Ghani says it won’t be difficult to find enough investors for the sukuk even if they are priced as tightly as Khazanah’s non-SRI offerings. Future sukuk under the programme are likely to price in the same area. 

The bonds were issued from a recently approved MR1bn programme for Ihsan Sukuk, a special purpose vehicle supporting Khazanah’s corporate and social responsibility efforts.

The SRI sukuk programme was granted a preliminary rating of AAA by RAM.

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