The Malaysian sovereign's successful launch of the world's first Islamic global bond, amidst considerable political turbulence, demonstrates both the strength of the country's credit and the sophistication of the sovereign as an issuer. The $600 million, five-year floating rate deal, for which HSBC was the sole bookrunner, pioneered an innovative structure that was designed to appeal to both mainstream and Islamic investors who are restricted by Sharia law which forbids the receipt or payment of interest.
The deal involves the use of a special purpose vehicle, Malaysia Global Sukuk, to purchase land parcels from a statutory body. The land is then leased back to the government. Investors purchase rated trust certificates (sukuk) from the SPV for the duration of the lease and receive periodic payments that are met with rental income from the government to the SPV of an amount equal to six-month dollar Libor plus the sovereign's spread.
Investors therefore receive regular payments that are comparable to coupons but are Shariah compliant since payment comes from the lease. The principal is repaid on expiry of the trust certificates through the government repurchasing the land at the agreed exercise price, which is a sum equal to the issue size of the trust certificates.